Wednesday, November 12, 2008

Great Olbermann Comment on "Pro Marriage" Amendments

WOW. Amazingly great Special Comment by Keith Olbermann on "protecting marriage" amendments. (Focus on Proposition 8 in California, but it's just as applicable for Florida's Constitutional Amendment #2 that passed last week.) 

If only Keith had made this comment BEFORE the election! But bravo to him for pointing out the hypocrisy of the marriage amendments nonetheless!

Check Cashers Redeemed

Great article in the New York Times Magazine this past Sunday on check cashing businesses and how American banks have ignored the needs of the poor - as well as ignored the huge financial opportunities in serving that market! 

As I've pointed out in every class, there's something to be said for serving the world's poor, profitably. (The title, in fact, of C.K. Prahalad's Harvard Business Review article.) The amount of money charged by check cashing businesses is huge, but, as the article points out, the lack of "traditional banking" services in poor areas suggests that check cashing businesses are actually making many customers better off than if the check cashing businesses didn't exist at all. However, the fact of the matter remains that the gap between what traditional banks could do to serve the poor (at a profit) and what check cashing businesses provide (and charge, for a huge profit), suggests an enormous opportunity for banks - such as Bank of America - to serve this market with tailored solutions that are profitable and grow long-term customers. To that point, it's interesting to read some customer quotes about how loyal check cashing customers actually are, because all the traditional banks had ignored them or charged them exorbitant fees when something went wrong. 

The most inspiring part of the story was that of Tom Nix - of Nix check-cashing. He sold his business to a credit union, which kept him on as president and - together - they added a credit union window at every check cashing location. Tom's goal is to convert traditional check-cashing customers to credit union customers over time - because the business could still make a lot of money serving these customers and the customers would be better off working with the credit union side of the business!! Fantastic!

In addition to explaining the check-cashing business, payday loans, the customers who use such services and the creation and on-going transformation of Nix - the story also provides some insights into how local governments are trying to create similar models for serving their poor with higher value banking services at a lower cost than the check-cashing and payday loan services. Overall, a very, very good article! 

Tuesday, September 30, 2008

New JetBlue Terminal at JFK

Yesterday, while talking about STP and the importance of making sure your marketing mix supports your positioning, I talked about JetBlue's new terminal at John F Kennedy (JFK) Airport in New York. 

Here is a link to the 3-minute Ad Age video podcast on iTunes regarding the terminal and why JetBlue built it. 

Thursday, September 25, 2008

Adam Smith was Right

As often happens, economic turmoil begets questions of whether free market thinkers were right or wrong – and whether regulation needs to be increased to preserve the country’s economic integrity. Now, even greater questions need to be asked: should the government be bailing out companies that make bad bets, and if so, who ultimately pays for these bailouts? These questions are ironic, particularly from avowed free marketers, because Adam Smith himself warned about the challenges of capitalism in his conclusion of the mercantile system in 1776:

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. The maxim is perfectly self-evident, that it would be absurd to attempt to prove it. But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.

Today, we find ourselves precisely where Adam Smith said we would be.

The irony of US Taxpayers bailing out banks is that the bailout follows years of the banks insisting – and getting – less banking regulation. This gave banks the ability to branch into other businesses and freedom from oversight of financial derivatives so complex that most bankers don’t even understand what they’re buying and selling. It’s truly appalling that the U.S. Government is bailing out bankers who made outrageous bets and, now get to keep “earning” their six and seven-figure incomes while their banks are in bankruptcy. And what do consumers get? They get to pay for incompetence of these avowed “free marketers” through taxes.

The banks also asked for – and got – a new bankruptcy law that makes it much harder for consumers to discharge debt. This makes it much more lucrative and less risky for banks to extend even more credit to the American consumer. The avowed “free marketers” claimed that the new law benefitted consumers who couldn’t get loans before – and therefore caveat emptor, let the buyer beware – and somehow this was a great way to let individual consumers decide what is best for them. But that is a very naïve view of how marketing and banking work. While not perfect, banks are far better at predicting which consumers are likely to default on a loan or credit card than the individual consumers themselves. Banks have the advantage of being able to model consumer behavior using enormous databases of past consumer behaviors to understand how similar consumers will act in the future. A first-time homebuyer has no experience paying a mortgage, property taxes and upkeep for a home.  So the bank has an overwhelming information advantage over the consumer, yet the new bankruptcy laws put the burden on the consumer. And what happens when the late charges and higher interest rates force homeowners to give up their homes, their down payments and their dreams? The banks take the homes and the US Government bails out the banks. And consumers get to pay again because the avowed “free marketers” got the bankruptcy law they insisted would help the consumers – but didn’t.

Trying to feed alongside the bankers at the trough of public money last week were American automobile companies. The group is led by G. Richard Wagoner, the CEO of General Motors. Mr. Wagoner is the same man who orchestrated his company’s purchase of Hummer in 2000 because he was confident GM had tremendous opportunities to “grow the brand” of a truck that yielded seven miles to the gallon. The same man who has been arguing against raising the US fuel economy standards and fervently fighting the reclassification of light trucks since at least 2001. The same man who, in 2002 when Toyota was experiencing tremendous success with the Prius, stated, “I don't think anybody's got confidence that the economics make any sense,” and then gave us the Hummer H2 – which gets eleven miles to the gallon. Now Mr. Wagoner and executives from Ford and Chrysler are pleading for subsidized loans to make more economical vehicles.

Of course the ultimate irony of all this is that the big three have been making gobs of money selling Americans gas guzzling SUVs over the past decade while their Japanese and European competitors focused on making great cars that are much more fuel efficient. Now the big three want the US taxpayer to subsidize building more fuel efficient cars so they can compete with their Japanese and European competitors – and make money by selling Americans more fuel-efficient cars to replace the SUVs they so happily sold them. So Mr. Wagoner pulls in millions a year over the past decade based on his leadership of (1) buying the Hummer brand, (2) lobbying Congress not to raise gas standards because that would make GM uncompetitive, (3) selling Americans gas guzzling vehicles, then (4) realizing that GM needs to sell Hummer because no consumer would buy a Hummer with gasoline at $4 a gallon, and (5) lobbying Congress for more handouts, because somehow items 1-4 were not his fault. And what do the American consumers get? Gas guzzling vehicles, more polluted air, greater dependence on foreign oil and, ultimately, stuck with the bill for Mr. Wagoner and his avowed “free market” cronies’ highly paid “leadership.”

Adam Smith was right. True capitalism benefits the consumer. But too often, the needs of America’s consumers are almost constantly sacrificed to the needs of America’s producers. 

Wednesday, September 17, 2008

Social Responsibility & Ethics: Student Loans and Google

Well, having just finished up our sessions on Social Responsibility and Ethics in Basic Marketing, I was surprised to see two of the topics covered show in the New York Times in the following days. 

Code of Conduct for Student Loan Companies
First, eight student loan companies - seven of them were being investigated by the New York Attorney General, Andrew Cuomo for misleading students about the obligations and attractiveness of various student loans - agreed to a new "code of conduct" and put up $1.4 Million to fund efforts to educate students and their parents about the risks and responsibilities inherent in taking out student loans. [You can see the NYT's article here.]  

If you go the Attorney General Cuomo's web site, you can see the kinds of things that are now prohibited under the code of conduct, which include: 
  • using logos and return addresses that made it look like the lender's solicitation to consumers was from the federal government or the student's current lender;
  • mailing fake checks or false rebates offers on current loans to entice students to take out loans;
  • giving inducements to students, such as gift cards, iPods, and GPS devices, to distract students from focusing on the (sometimes onerous) terms of the higher education loans being promoted;
  • offering inducements to students to convince their friends to take out loans with particular lenders;
  • making false and misleading representations as to the advantages of private student loans over lower-cost federal loans;
  • providing illustrations of loan costs or terms that are available only to a tiny fraction of borrowers without disclosing that fact;
  • failing to guarantee that advertised borrower benefits, such as discounts on the interest rate of the loan during the repayment phase of the loan, follow with the loan, regardless of who purchases the loan in the future.
What's kind of amazing is how these seem like very straightforward - and commonsense  - ethical obligations. But sometimes, when companies get into the thick of things in trying to compete with others, they can lose perspective of what's ethical and what's not. Also - as is clear from the code, which is based on questionable practices that already existed in the industry - is that what's best for the customer clear gets lost!!  Hence, to the point made in class, having an explicit code of ethics is so critical for so many companies. If everyone knows what's "OK" and "what's not," then it's a lot more likely that everyone will act appropriately and not start down the slippery slope of doing things that, in hindsight, clearly look wrong. 

Also, to the point of our conversations, it's interesting that it took the threat of legal action by the New York Attorney General to make this happen. So again, the role of government and the law have a role to play in making consumers better off. 

Is Google behaving monopolistically? 
Another article was fascinating because it deals with whether Google is acting in a monopolistic fashion in dealing with its customers (who buy advertisements from Google) and its channels (who sell advertising space using Google). 

One source estimated that Google controls nearly 70% of the on-line advertising market through its various programs that sell and buy space on Google web searches and a plethora of other web sites. OK, by classic Industrial Organization Economic's standards, that's sounding pretty monopolistic. 

Of course, the "Chicago School" would argue that just because Google does a better job than any other service of matching buyers and sellers of advertising doesn't make them "bad." 

I fall somewhere in between - in kind of an "it depends" area. I agree that being successful and, therefore, controlling 70% of the market doesn't mean that a company is "bad." The key underlying concern of the antitrust laws is that a company doesn't act in monopolistic - and, therefore, anti-competitive - ways to prevent competition. (Just to be clear, that's where I think the Chicago School economists were way off base regarding Microsoft, which did use its market power to prevent competition and, therefore, maintain a monopoly in operating systems and create a new one in web browsers.) 

Anyway, back to the article, I think the case against Google is without merit - at least as portrayed in the New York Times article. The key to the article was a case study of Mr. Savage, who built a business model based on the following: 
Mr. Savage estimates that he was paid around 10 cents every time someone clicked an ad on his site. The difference between that and what he paid Google to advertise against search terms — usually around 5 or 6 cents —was his profit.
The article goes on to state that Mr. Savage's business model was pretty much destroyed when Google changed how it bought and sold ads. 

But it doesn't appear to me that Mr. Savage has much of a case. His entire "business model" was based on arbitrage opportunities - the difference between what Google could be selling ads for and what it was selling ads for. If Mr. Savage's "service" actually had value beyond arbitrage  - he runs, which is a directory of business-to-business companies - he'd be able to charge: (1) companies who wanted to be listed on his service and/or (2) people who wanted to access his directory. But since he made his service free and then made his money by buying Google ads cheap and selling ads back for twice as much, it appears that the market cleared a bit and Google finally figured out a way to leave less money on the table for arbitrators. 

Well, regardless of what I think, if you read the article you'll get a pretty good sense of why policing anti-competitive behaviors can be difficult. It also highlights the challenge of when people use anti-trust laws to challenge a company, even when there is no merit to the case - whether that's the situation with or not. If people cry "monopoly" too often, I think the courts and justice department become overwhelmed and have less to time spend on actual violations of anti-trust laws. 

Thursday, September 11, 2008

If you don't vote, you're a moron.

Great monologue from Craig Ferguson on 10Sep08!!! You need to watch the whole thing. It's a great commentary on the media, politicians and Americans. The bottom line, "If you don't vote, you're a moron!!" (It'd be great if all Americans were as passionate about voting as Craig, who's been a U.S. citizen for less than a year!) 

Saturday, September 06, 2008

If you don't have new customers, how can you have loyal customers?

OK, executives in the airline industry have officially lost their minds. On Friday, 05Sep08, Continental Airlines decided to start charging $15 for the first bag checked - much like American Airlines and the other airlines that followed. Interestingly, the NYT article about this stated a caveat regarding the fee: 
Continental, based in Houston, said the fee would not apply to elite members of its frequent-flier program, those in first- or business-class seats, customers traveling on full-fare economy tickets, or military personnel and their families traveling on official orders.
Now, two fascinating things about this development. First - as mentioned in an earlier post and updated regarding Southwest Airlines' response in a later post - is the extra fee really worth the aggravation? It certainly can't be good for the brand or customer satisfaction. 

In fact, I looked up the airline satisfaction ratings on the American Consumer Satisfaction Index (ACSI) website and - big surprise - Southwest is the highest rated airline and American, Continental, Delta, Northwest, United and US Airways all are rated below average in customer satisfaction. And those ratings were collected before American instituted their baggage fee!! (Note, ACSI is the satisfaction model I discussed in class.) 

Just to make sure it wasn't purely an ACSI data abnormality or something, I took a gander and J.D. Powers's website and found their most recent Airline satisfaction numbers. At first, I was surprised that Southwest wasn't even mentioned in the press release. Instead, it stated "Alaska Airlines, Continental Airlines and JetBlue Airways Rank Highest in Customer Satisfaction." What's going on here? 

Well, it turns out that JD Powers separates "Traditional Airlines" from "Low Cost Airlines." (I guess calling the "traditional airlines" "full service airlines" would be too much of an oxymoron.) Anyway, although they're separated, both categories use a 1,000 point scale. So, combining the charts from JD Powers, here's what they would look like:
  1. JetBlue Airways - 776 points (JetBlue is not rated by ACSI)
  2. Southwest Airlines - 728
  3. Frontier Airlines - 715 (not rated by ACSI)
  4. Airtran Airways - 708 (not rated by ACSI) 
  5. Alaska Airlines - 684 (not rated by ACSI)
  6. Continental - 684
  7. Delta - 669
  8. Air Canada - 654 (not rated by ACSI)
  9. American Airlines - 644
  10. US Airways - 640
  11. Northwest - 628
  12. United - 628
Also, note that beginning with #5, Alaska Airlines, all of the "traditional airlines" are rated at number 5 or lower in customer satisfaction!!

So, the way that the airline executives think they can increase customer satisfaction - and therefore long-term shareholder value - is to aggravate customers even more than they have already, while the "low cost" airlines eat their lunch. Hmmm...."How's that working out for you?" 

OK - time for the second point, and the title of this posting: If American Airlines, Continental and the others waive baggage fees for their loyal customers (e.g., elite frequent fliers), but charge new/infrequent customers to check bags - how in the world will they ever get any new customers to be loyal? This makes no sense!! The only non-elite people who would fly them regardless of the baggage fees would not have a choice (e.g., Continental has a near monopoly on Cleveland, OH). Of course, if people don't have a choice, why give them incentives to fly you anyway?  In fact, getting back to the example of Cleveland - once Southwest added Tampa-to-Cleveland connection, I stopped flying Continental and refuse to fly them again if I have a choice. 

Hence, by only charging the "non-loyal" customers for baggage fees, you'll never increase the loyal customer segment of customers. I'm not sure they'll be able to replace the loyal customers they're losing!! If I believed in conspiracy theories, I'd be inclined to think that it's Southwest and JetBlue - currently the highest rated airlines in terms of satisfaction - that somehow got American, Continental and the others to institute these fees!  (OK, I'm not a conspiracy theorist, but how someone could possibly think that by offering crappier service and charging more will attract more customers is beyond my comprehension.) 

The bottom line: before focusing on your "best customers" to the detriment of your other customers, it's always a good idea to make sure of two things. First, are you really making more money on those customers - or are you giving all the margins away by trying to keep them happy? Second, make sure you've got a way to get new "best customers." Otherwise, your "best customers" will keep declining until you have no more - and then it's too late! 

I can't wait to see the next batch of airline industry customer satisfaction numbers that include the baggage fees;-) 

Knowing your target market & decision-maker

Over the past two weeks, we've been going over STP (segment-target-position) as part of the overview for Basic Marketing. Related to knowing your target market - and just as importantly - the decision-maker (which is not the same thing), there was a clever post on the New York Times "For the Moment Blog" last week regarding ads for men's underwear. The guest blogger (Grant Thatcher) made the observation, regarding pictures of good-looking men in underwear ads in Milan: 
Do Milanese men have a preternatural desire to look at muscular, seminaked men? Well, of course in some cases, yes, but the canny luxury labels are well aware that the men’s knit underwear industry is worth a staggering $1.1 billion — and even more interestingly, the majority of these briefs are actually bought for men by women. Ding! Now you wonder what’s with all the muscle dudes. … Go figure.
Very funny! And, to the point, although men are the target market for men's underwear - it's either women (or gay men) who are typically making the purchase decision. (OK, to be clear, I mean "or gay men buying underwear for themselves," I think.) So they're the ones you need to target with promotions if you're selling men's underwear. And, apparently, it's also somewhat aspirational for most purchasers, since they think their beau will look as hot in the underwear as David Beckham, etc. 

And lest any guys think this is a bad example, let's just try putting the underwear on the other....well, you know what I mean..... Who do you think spends more time looking at Victoria's Secret catalogs - men or women? How many men buy have bought "items" from Victoria's Secret for their wives/girlfriends as a "gift." (A gift for whom, is all I can think.) 

And of course, taking it all away from sex (or, more precisely, talking about the consequences of all that undergarment inspired sex), even though little kids are the target market for all-things-Sponge Bob, it's Mom or Dad who's the decision maker and ultimate purchaser. 

Anyway, the bottom line is: know your target market - and who the decision maker is. And you should never pick a target market without knowing who the decision maker is, otherwise, you might not have a much of a market at all. 

And with that, I've just got to post this video from AussieBum. It's the same video Grant posted on his NYT's blog. The music is "Would you...?"  from Touch and Go and is downloadable from iTunes. (Yea, I really like the song....):

Thursday, July 31, 2008

Hurling down the low road at a breakneck pace - McCain Internet Ad

While searching for a quote on Communism today, look what I ran across! 

The advertisement is paid for by the McCain campaign and it opens a link to weird "petition" (i.e., campaign mailing roster) regarding energy independence on McCain's website.  How very, very sad. McCain's entire campaign has become "anti-Obama" instead of why people should vote for McCain....  I actually gave money to this guy in 2000 in the hopes he'd be the Republican nominee over George W. Bush!  Wow, how times have changed!!

Update: Even sadder - on two levels. First, rated this claim a "Pants on Fire" lie (a rarity in their ratings). It certainly is a "different kind of campaign" when John McCain pays for blatant lies after they've been pointed out. The even sadder bit? It was the Florida GOP that started this rumor:-( 

Monday, June 23, 2008

Way too cool - but why?

Reading AdAge's "Creativity On-Line" this morning, I became hopelessly entranced by a link to the "UNIQLOCK," which AdAge predicted may win one of the top awards at the Cannes Advertising Award extravaganza. Anyway, I'm just totally enthralled by this website/blog widget. Mostly, because I can't figure out how anyone makes money with it:-) The T-Shirts? Hiring the producers? I'm not sure.... Nonetheless, it is really cool. You can access the website directly - and post it's HTML into your blog/website as well....(I had to post pictures of the clock - because the widget was just getting too annoying for me. OK, maybe it's not that cool as a widget, but it is still cool to watch. 30Jun08.)

Tuesday, June 10, 2008

Awesome: Game Theory and Southwest Airlines' Response to American Airlines' Baggage Fee

Let's hear it for the usefulness of game theory!!!

Two weeks ago, I wrote about American Airlines' (AA) bone-headed move to charge for all baggage, which included these little tidbits:
".... This is an idea straight out of an Excel spreadsheet designed by a newly-minted MBA with no concept of value propositions or game theory. 
.... But what I hope happens, and is certainly possible, is that Southwest or JetBlue will start running ads that focus on "our price includes everything, including your bags."  Or even better, "Why pay extra for your bags on AA if we're more likely to get them to where your going for free?" ...."
Regarding the first point, I subsequently found an AA press release stating exactly what I suspected: 
Additional Revenue Initiatives
.... Today, American introduced a $15 fee for the first checked bag, given the increasing costs of transporting checked baggage.... American also said today that it has increased its fees for certain other services, ranging from reservation service fees to pet and oversized bag fees. The increases mostly range from $5 to $50 per service. The company estimates that new and increased fees announced this month will generate several hundred million dollars in incremental annual revenue.... 
 I think we need to put that quote into a marketing textbook as the antithesis of a market-orientation!! paraphrase Dr. Phil, "How's that working out for you?"

Oh, wait, I think I have an idea how it's working out for you!!! 

As I predicted, relying on rudimentary game theory, Southwest Airlines has responded with competitive gusto!! Rather than talk about it, I'll just offer the following evidence. Enjoy!

Southwest Airlines Newspaper Advertisement

Southwest Airlines' Website:

Southwest Airlines' Television Advertisements:

Flight Attendant 


Friday, May 30, 2008

Two recent profiles

I still vividly remember, during my employment interviews at Frank Lynn & Associates in Chicago, when  John Henderson observed that I "was odd" because I downplayed my experiences while most interviewees overplayed their experiences. My recollection of his comment was something to the effect of "What's wrong with you?" After thinking for a second, I said something like "I'm from the Midwest. It's not cool to toot your own horn." He informed me that that was a rather odd strategy - particularly for a consultant. Frank Lynn & Associates hired me anyway and they were (mostly) very happy with their decision. (My tendency to be deadline driven freaked out a few people, initially, until they realized I always came through in the end and consistently exceeded clients' expectations.) 

Why share that story? Well, I wanted to share two recent profiles of me posted on the Internet, but somehow felt the need point out that I'm still struggling with the Midwestern notion of not bringing attention to myself. Oh well. I have a friggin Blog, for goodness sakes! So, John, I am getting better at promoting "Brand Me" - but I still feel weird about it. 

So, here we go. I have two new profiles of me that have popped up on the Internet! They're both pretty cool - if I do say so myself:-) 

Sunday, May 25, 2008

Achtung, Achtung: BMW, was machen sie?

I love BMWs. They drive great, they're solid and, quite honestly, I think they're worth the price. It really is the "Ultimate Driving Machine." 

But what's really been driving me crazy for the past 2+ years is the lack of diesel BMWs in America. Ironically, BMW sells far more diesel-powered that regular gasoline automobiles, even when you include American sales. The reason BMW has not yet introduced diesel models in America is our strict emission regulations - particularly in California. But BMW finally has a solution: BluePerformance. They're planning on launching diesel versions of 335d and X5 in the Fall of 2008. 

Besides the delay - I assume due to engineering the new BluePerformance technology into the vehicles - what's making me a little nuts is that BMW is missing a HUGE opportunity in the United States by only introducing these two, very powerful vehicles. Yes, BMW has gotten kudos for their reduction in CO2 emissions and having fairly fuel-efficient cars. But their obsessive belief that BMW-buying Americans only care about speed and power is clouding their vision. Every customer is NOT obsessed with having the fastest or most powerful car. Some of us actually like having a car that's fast enough, powerful enough, but really incredibly engineered and exhibits supreme handling as well. Yes, it's the "ultimate driving machine," but that doesn't need to be solely about the number of seconds it takes to go from 0 to 60. 

Here's my point. I read the most incredible article recently comparing a Toyota Prius and a BMW 520d in England. (The 520d is a 4-cylinder diesel not sold in North America.) The amazing finding? The BMW 520d had better gas milage than the Prius!!!  

Also, the BMW118d  recently won the "World Green Car of the Year" at the New York auto show, based on it's super low emissions and 47+ miles to the gallon efficiency. But we can't buy the 118d in America because, apparently, BMW managers are worried that we're too speed and power obsessed to buy it. (Also, it has a hatchback, which BMW hasn't figured out is now a good thing in America, in contrast to their experiences with the 318 years ago. That's surprising since BMW is selling a ton of Mini Coopers in the US - so they certainly have first hand experience suggesting that hatchbacks are not the kiss of death anymore in the premium segment.) 

So Americans are going crazy with rising gas prices, finally buying more cars than trucks and preferring small cars with excellent gas milage over big, heavy traditional boat-like cars. But no car company is serving BMW's traditional upscale market segment - yet. So why delay? BMW has the technology and a range of models NOW that address Americans' new found desire for efficiency. There are a whole bunch of us who can afford a BMW and would like a nice car that gets great milage. (I'm sorry, the Prius is awesome technologically, but I'm just not going to buy a car that looks and feels like a college engineering experiment.) 

BMW has a unique window of opportunity to really increase their market share in America and simultaneously do the right thing - help us conserve energy. They can still sell their high powered, super fast cars as well (such as the 1-series with the 3-series 6-cylinder engine designed for America), but give us a choice. If nothing else, why not bring a bunch of the diesel powered cars to America and invite your customers to test drive them on an American city tour? How cool would that be? Plus, BMW would get first-hand feedback from current owners. Who knows, they might surprise BMW - and BMW might surprise BMW owners. And how great for the BMW brand to be known as the ultimate driving machine on all dimensions: awesome to drive, superior engineering, efficient and green as well? That value proposition seems perfect for a large portion of BMW's target market in America.  

Please BMW, I love your cars. Is it too much to ask to let me buy one that I can enjoy filling up as much as I enjoy driving?  

Prediction: American Airlines's Chaos-Causing Baggage Fee

Wow, just when I thought the "major" airlines couldn't screw up the business anymore, American Airlines has proved me wrong by instituting a $15 per piece baggage fee.  This is an idea straight out of an Excel spreadsheet designed by a newly-minted MBA with no concept of value propositions or game theory. 

I can totally see how the baggage fee looks brilliant at first blush. The baggage fee is not shown on the ticketing websites and, therefore, presents an opportunity to add an additional fee on top of the airfare, which is salient when people choose a carrier/flight. Basically, American Airlines (AA) can price at perceived parity with their competitors, but then grab an extra $15-30 of revenue when the customer checks in. If no other carrier follows suit, AA can effectively charge $15-30 more per comparable flight without losing many customers by decoupling the total fee from the salient time-of-purchase posted price. 

So, what's wrong with this approach? Well, three things. First, this kind of shenanigan is perfectly transparent and screams of "gotcha capitalism" - which really honks people off. My favorite (or least favorite, to be consistent) version of this is hidden hotel fees. The most exorbitant are city/state taxes/fees - particularly in New York City, Chicago and San Francisco - and are not included in the price quote when you make a reservation. I blame silly politicians for this bait and switch concept of sticking it to the tourists and business travelers - which I've got to believe has a long term negative impact on tourism (i.e., "I hate getting a hotel in New York because the actual price is oftentimes 50% more than the quoted price").  But the really maddening fees are the "safe fee" and the "gym/spa fees" which previously were included in the price of a room. Now hotels do this really slimy thing where they don't include the fees in the original price quote/reservation, but charge you for various sundries when you check out. If you say nothing, you get screwed. But even if you try fighting these hidden gotcha fees, it's hard to win the argument. Assuming no other airlines are silly enough to institute a baggage fee, people's attitudes toward the AA brand will decrease and AA's ability to charge pricing premiums or realize higher choice rates based on their brand name will decrease over time. I'm guessing that notion isn't in the MBA's awesome baggage surcharge spreadsheet. AA might lose a lot more than it gains by instituting the baggage fee.  

The second reason this is a bone-headed move is that if you look at the outcomes from a competitive standpoint, none of the three most likely competitive reactions are net cash flow positive over the long term. The competitive reaction AA is most likely hoping for is that no other carrier implements the baggage fee and, thus, AA charges a net higher fee for all its flights than competitors for comparable routes. But that doesn't take into account the damage to the AA brand - which will likely increase pricing sensitivity toward the AA brand and also lower consumers' a priori preference for AA, meaning they'll sell less tickets when they go head-to-head against other carriers. The next most desired outcome for AA is probably that all the major carriers match AA's move and, thus, every carrier can charge more for their tickets than they do now. But so what? By going first, AA hurts its brand and risks that others won't follow. Even if we assume that the impact on AA's brand is minimal and other carriers follow, AA has just created the same prisoner's dilemma they created with their frequent flier program: if every carrier implements the same policy, AA has no advantage over the others. But what I hope happens, and is certainly possible, is that Southwest or JetBlue will start running ads that focus on "our price includes everything, including your bags."  Or even better, "Why pay extra for your bags on AA if we're more likely to get them to where your going for free?" (I really like that one, but don't have time to see if Southwest or JetBlue do a better job at getting bags to the same place as passengers.) The bottom line of this will be that AA will need to rescind their baggage fee - which will have a net cash flow negative impact by (a) hurting the AA brand equity, (b) incurring significant set-up and tear down costs for the program and (c) enhance the brand image of competitive carriers. None of these likely outcomes is a net cash flow positive for AA. 

OK, the worst part of AA's baggage fee policy will be to make air travel even more unpleasant than it already is - which is stunning!! First, I'm getting sick to my stomach just imagining all of the "amateur" travelers holding up the check-in lines at airports arguing about the baggage fee, explaining they don't have the money on them to pay for the fee, and generally spreading bad Karma everywhere. That should really help ticket agent turnover - assuming you're trying to make it higher!! Second, as if making the seats smaller as Americans keep getting bigger wasn't awful enough  (another bone-headed Excel spreadsheet decision attempting to maximize capacity), AA has just significantly increased the insanity of passengers taking everything they own into the cabin. Every flight I can remember over the past five years that was 80% full included flight attendants racing around like they were playing some insane whack-a-mole game trying to shove baggage into overhead compartments, which oftentimes ends by tagging a few gigantic bags for jetway luggage handling before the plane could take off. In fact, I almost always check my luggage and just take my laptop briefcase with me anymore because I just don't want to deal with all that chaos on the plane. 

So what's the likely impact of AA's new baggage fee inside the cabin? More people carrying more crap onto the jet that clearly won't fit. More aggravation for travelers. More aggravation for flight attendants and pilots. And more delays. When AA loses baggage that they've now charged extra for (and they will, because there's always some chance baggage gets lost/incorrectly routed), they'll be hell to pay by travelers who paid $15 to not have their bag show up at their destination. 

And heaven forbid the other airlines follow suit with a baggage fee - we can all look forward to even more unpleasant experiences flying in America. I, for one, wish we had better trains in America because I just can't stand flying anymore - and it's only going to get worse until some airline wakes up and figures out that there is a HUGE opportunity in making flying a pleasant experience again. (And, please, make the seats bigger too.) 

Thursday, May 15, 2008

Why Obama is the Candidate Most Likely to Create Change in Washington

A few years ago my colleagues and I studied how organizations create a greater market focus. One of our most striking findings was that change begins with a new leader who is focused on improving organizational processes – rather than focusing on a discrete monetary or market-share goals. Successful leaders focus on imbuing their organizations with six key values: trust, openness, keeping promises, respect/empathy/perspective taking, collaboration, and the market as the raison raison d'être

Leaders forced organization members to interact and create a shared understanding of the market by sending cross-functional teams into the market (e.g., a purchasing agent, engineer and shop floor worker would visit customers and distributors together). By focusing on common experiences and a shared understanding of the market, organizations became more market-focused and, thus, more successful than before. Perhaps the best-known example of such a transformation occurred at Harley-Davidson Motor Company, which narrowly escaped bankruptcy in the 1980s to become one of the most successful American manufacturers in the 1990s and continues to exceed expectations today.

There are striking parallels between our research and the two remaining Democratic candidates. Hillary Clinton’s style is consistent with the notion of a mythical, all-knowing leader who provides all the answers for fixing an organization – a style we found unlikely to create positive organizational change. Hillary Clinton and the media consistently comment that she has more detailed policy positions and she vociferously defends those policy positions as unambiguously better than Senator Obama’s positions. Ironically, there appears to be an implied assumption that President Hillary Clinton would implement better policies and could do so because of the harsh lessons learned from her health care efforts in the early 1990s. Yet, she continues to insist that she somehow has greater insight and better answers than anyone else. This begs the question if she has, in fact, learned from her earlier failures.

Conversely, Barack Obama’s style is consistent with successful change leaders: someone who gets people to focus on common issues and who realizes that the process of agreeing on a shared understanding of a situation will lead to greater cooperation, trust and success. Whereas Senator Clinton focuses on explaining that her policies are better, Senator Obama is focused on fixing the process of developing and implementing solutions. Although some may see this as a weakness for Senator Obama, our research suggests that his approach is more likely to be successful at creating change because it allows other people to participate and take ownership in the change process.

Differences between the candidates’ styles appear fairly stable and, thus, allow voters to project which candidate is more likely to actually move America in a positive direction. Senator Clinton is well known for her ability to “fight.” Whether comparing herself to the fictional character Rocky in Philadelphia or committing to “fight” for voters in Ohio, the common theme is her tenacity in fighting for what she believes in. Unfortunately, in spite of her tremendous intellect and grasp of policy details, it’s absurd to assume she has all the answers. Furthermore, which Americans would President Hillary Clinton fight with, exactly? The role of President is to lead everyone: Republicans, Democrats, Greens, Libertarians, and independents. Historically speaking, it’s difficult to comprehend how a President who is committed to fighting with members of Congress can accomplish much at all. Sure, with majorities in the House and Senate, a President can force through controversial legislation, but that won’t change the tone in Washington. Additionally, as President Bill Clinton discovered in 1994, it can have disastrous effects in the next election cycle.

In contrast, Barack Obama has a long history of working with competing interests to find acceptable compromises that everyone can agree on. Biographical sketches of Senator Obama have included interviews with colleagues who joke that Senator Obama’s approach of hearing everyone’s opinion before working on a common solution drove them a little crazy – but it worked. Although on a much larger scale, that community organizing approach – premised on respecting the inherent dignity of every person and listening to everyone’s concerns – bodes well for an effective commander in chief. Senator Obama’s personal history as the son of an African father and a white, American mother who later married an Indonesian man appears to have nurtured his ability to empathize and understand a wide array of viewpoints, which has become extremely honed throughout his life. Senator Obama’s speech on race relations was an astounding example of his ability to empathize – and truly understand – the perspectives of both white and black Americans.

Senator Obama shares three other characteristics with successful change leaders: honesty, authenticity, and a willingness to admit he was wrong. Although empathy, honesty, authenticity and a willingness to admit one is wrong are not all that’s needed for a successful leader – but it’s certainly the first step in being able to work openly and honestly with a wide range of people to create shared understandings and work on effective solutions.

The characteristics of successful leaders in business transformations appear to be the same ones this country could use in moving us forward. When choosing a company president to transform a company, shareholders are better off choosing a leader rather than a fighter. That’s something the Democratic Party and America should consider as we choose a President for all of us.