Riffing Space

The less remarkable a product is, the more that price becomes a factor. This is now evident as Starbuck’s coffee becomes ubiquitous. There was a time when Starbuck’s made me passionate about coffee when they first came to Los Angeles nearly 20 years ago. I often credit this passion for coffee as leading to my passion for food and wine. Anybody who knows me can attest to the importance of these three things in my life. But I have long since abandoned as my coffee purveyor of choice as the product has become less, well, remarkable.

John Moore, who honed his marketing skills while working at Starbuck’s, takes issue with the problem them as they choose to lower their prices:

Starbucks CEO Howard Schultz once said, “Our marketing will emphasize quality and service, not price.” He’s now doing something different.

In a bigger shift in marketing strategy than spending millions on national television advertising, Starbucks is now selling short-sized cups of brewed coffee for a $1.00 and offering free refills at Seattle-area locations. (Reuters link | WSJ link)

Oh My! That is a MAJOR shift in strategy for Starbucks. Here’s why…

“Starbucks fiercely protects its pricing power because it knows a low-price strategy is the quickest pathway to commoditizing and marginalizing coffee back to being, well, just coffee. It also knows if it lowers prices, it will have a hard time ever raising them again. Most important of all, Starbucks knows higher prices bring them healthier profit margins, which fuel the cozy experience customers enjoy. By ever deciding to run itself as a priced-to-sell retailer, Starbucks would be admitting it no longer values a unique product or a unique customer experience. Seth Godin, author of Purple Cow, goes one step further, saying that a low-price strategy is “the last refuge of a…marketer who is out of great ideas.” The folks at Starbucks are too smart, too savvy, and too creative to fall for the low-price trap. And if they ever did, Starbucks as we know it—Starbucks as a forward-thinking company—would cease to exist.” SOURCE

Those words were written in TRIBAL KNOWLEDGE, my love story to a company that shaped how I approach marketing. In my eight-years there, we, Starbucks marketers, would have never considered promoting a $1 Cup o’Joe to increase sales. Instead, we would have used of a combination of these ideas to solve for Starbucks problems.

A “cheap coffee strategy” … Oh My! is right; because, a low-price strategy is indeed the quickest pathway to commoditizing and marginalizing coffee back to being, well, just coffee.

Chris Anderson’s blog takes to task the idea that had the Wall Street Journal chosen to make its paid online service (which I pay for, in the interest of full disclosure) free, the site would have to gain massive traffic to make up for the subscription shortfall:

I love Bear Stearns analyst Spencer Wang, but he can do better than this. According to PaidContent, Wang calculates that if the Wall Street Journal online goes free, as its new owner Rupert Murdoch has said it will, it would have to increase its traffic 12x to make up for the lost subscription revenues.

WSJ.com revenue is currently pegged at $78 million annually, based on an estimated 989,000 subscribers paying $79/year. Including non-subscriber traffic, the company claims 122.4 million monthly page views. Based on an estimated CPM of $6 and a few other assumptions about sell-through rate and ad impressions per page, Wang arrives at the 12x conclusion.

The problem, Wang concludes, is that going free would only increase its traffic 6x. Thus a downgrade of 1 cent a share, which Bear Stearns made today.

Now putting aside the fact that a $6 CPM is absurdly low for a site like wsj.com (and the more important fact that I haven’t read the whole report, which may be more subtle than it appears in these reports), there is one thing clearly missing in this analysis: the indirect benefits of the Wall Street Journal reappearing in the online business conversation that it has largely ceded to others due to its subscription wall.

For instance:

• What about the new newspaper subscriptions that a 6x increase in web traffic will generate? (Print subscribers are typically worth five times what online viewers are worth, due to the higher effective CPMs of print media.)
• What about the increased buzz and respect that the ability for bloggers everywhere to link to wsj.com stories will engender, bringing the paper back to the front of mind of media buyers and thus bringing in more ads?
• What about the fact that, in a fierce competitive battles with its cross-town rival, the the New York Times, once nytimes.com went free, wsj.com had no choice but to do the same to maintain mindshare with an audience who are increasingly shifting online?

I don’t know how to quantify any of those factors, but I know they’re all non-zero, and in the case of second, at least, could be large.

And then there’s the small matter of simply migrating a powerful twentieth century brand into the twenty-first century, by understanding the forces at work in the new media landscape. It’s ironic that it took a septuagenarian oligarch to understand that free will be the only viable price for mass media online in a world of information abundance and attention scarcity. But as a fan of the WSJ who doesn’t read it often enough because it doesn’t show up in my RSS feeds, I’m glad he did.

The Rupert Murdoch decision to keep some of the Wall Street Journal paid content has caused some reaction in the blogosphere.

Fred Wilson says that Murdoch is making his first digital mistake – wasn’t MySpace his first digital mistake? – anyway, Wilson says:

Here’s the deal. Digital media is not about scarcity and never will be. That’s the old media game. Online it’s about ubiquity, about being part of the conversation, about links, authority, page rank, and if you are a news organization like the WSJ – its about anchoring the discussion… I regret the mistakes we made at TheStreet.com with a paid content strategy and I learned from it. Never again. Rupert will learn that lesson too. Apparently the hard way.

Ooh, we see the headline now: ‘Venture Capitalist to teach Media Tyrant lesson or two’… Anyway, here’s a far more informative opinion from Kevin Kelleher over at GigaOM where he wonders what everyone’s going to do when they realize there’s not enough money to go around:

Advertisers are pushing more ad dollars online, but the number of sites to house them are growing even faster. And so there is more and more discussion this month that CPM rates are falling. (There remain optimistic exceptions, however.) The relatively balmy climate of Web 2.0 means more sites are looking for ad revenue just as mainstream advertisers are contemplating cuts in their ad budgets… Rupert Murdoch was expected to tear down the subscription wall at the Wall Street Journal, but he revealed something quite different at Davos today.

Others will be tempted to follow Murdoch’s lead here. I’m not saying it’s a good thing — I doubt very much it will work as more than a stopgap fix. But the worse the overall economy gets, the more executives of companies making a buck from online ads will be pressured to do something — anything — to revive revenues.

That means a) cutting costs that are often already near the bone, b) getting very creative about finding new revenue streams or c) putting up pay walls. For some, paid subscriptions may be the easiest lever to pull.

It’s amazing to me how little credit we in the service industry give consumers. We persuade, we cajole, we come down from our perch of infinite wisdom to grace them with our greatness. And we make promises that mean nothing in the new economy.

Perhaps, at one point in time, our clients were ignorant fools in need of our supreme acumen. But, I have never experienced that. Okay, maybe I just attract smarter clients than most (which is most assuredly true), but I believe that we exist an age where clients are more informed about our industries than ever before. We are no longer gatekeepers (see my previous post). Yet, many still treat them as though we were in a different age long past.

No, they do not possess all the knowledge on a topic that years of experience has given us. That is why they come to us. We are there to offer more information than they have and, more importantly, to add insight. But, let’s not be condescending. Let’s not talk down to our clients. Let’s give them the credit that they are due. Let’s help them to make the decisions that are right for them. Let’s consult. Let’s inform. And, more importantly, let’s empower. (Okay, so they already are empowered. You are right…and that is exactly the point)

To tell clients that we will give them “excellent customer service,” that we will “exceed their expectations,” MEANS NOTHING. They already expect this. If you are not already providing “excellent customer service,” GET OUT OF THE “SERVICE” BUSINESS. To make these promises only tells me that a service provider will most likely NOT do those things. They will treat me as an ignorant fool that needs them to save me from myself. They won’t DO, so they PROMISE.

This is the important point: to make promises (and often, even, to deliver on those promises) is not enough. CREATE an experience, MAKE them money, PROVE your value. DO!

Transparency

As the world becomes more and more transparent, there is emerging an ever widening gap between the new class of information gathering consumers and the organizations that that seek to distort or, at the very least, hide the truth. Seth’s blog (check it out!) this morning got me thinking about the importance of transparency in the new modern economy. You can find out just about anything or anyone with a quick search on google. Companies spend millions of dollars to convince their customers (and potential customers) that their service is great, only to have websites like this one pop up at little or no expense.

Why hide information? In the old economy, it made more sense.

Hiding Information

Do consumers need to know everything about an organization? Obviously not. I am not going to let my competition know about the groundbreaking service that I will be implementing in eighteen months, only to have them take the idea and run with it in twelve. But we don’t have to be transparent about everything. Consumers don’t expect that. Some of them don’t expect much transparency at all.

Building Trust

But this is where they can be surprised. This is where you can build trust. Once a consumer (whether it is for a service or a product) recognizes this transparency, they inevitably will trust you more (a trust in which they have more confidence about as they gain more information). If they know they can trust you, they will be more inclined to trust your product or service.

Wiki-anything?

We are in the age of Wiki-anything. Information is free and readily available. Our value, especially as service providers, is to be a conduit for that information rather than a gatekeeper. To some people this is the same thing. In both instances information is flowing to the consumer. But there is a difference. If you are a conduit, you are not demanding something in return for your information.

Gatekeepers & Conduits

Consider the antiquated real estate industry (which I am a part of). At one point, a consumer would have to go to a Realtor if they wanted to know what houses were listed in the MLS. This was a way of guaranteeing a livelihood for hundreds of thousands of Realtors across the nation. But now consumers have a million places to go to get this information (most obviously, the internet). Did this kill the business? Well, current housing crisis aside, no. There are more agents out there than you can shake a stick at. Obviously it is just a lot more difficult to get and keep clients. And it is this way with most industries today. What used to make you valuable (the information that you had locked away) can now be gotten somewhere else. Now you have to earn your value in other ways. You have to be remarkable. You have to be worth talking about. You have to build a community of true believers around you and your product. You have to be trusted.

How can you do this? Be a conduit. Be transparent.

Just an idea. What do you think?

Walt Mossberg has a great article in the Wall Street Journal about the stranglehold that wireless telecom companies have on the mobile phone business–limiting choice and stifling competition.

A shortsighted and often just plain stupid federal government has allowed itself to be bullied and fooled by a handful of big wireless phone operators for decades now. And the result has been a mobile phone system that is the direct opposite of the PC model. It severely limits consumer choice, stifles innovation, crushes entrepreneurship, and has made the U.S. the laughingstock of the mobile-technology world, just as the cellphone is morphing into a powerful hand-held computer.       –Walter Mossberg, The Wall Street Journal

Mossberg also makes the great correlation between cell phones/wireless service and PCs/Internet Service.  Competition would bring better products to the market at better prices for the consumer.

Yes, as a person that has spent the past 22 years in one form or another of sales, I have done cold calling. I have even called people at home (though it made me feel dirty). And, of course, I have also received my share of such calls. The federal DO NOT CALL list was an answer to prayer for millions of Americans, but few realize that, as of Sept. 15, their registration on the list began to expire. That’s because there is a 5 year limit, after which people must re-register for another five years.

Newsweek reports that less than one-third of those who need to re-register on the Do Not Call list. According to them, marketers are ready to pounce. Chris Houchens makes the great point that people who didn’t want to be called 5 years ago, don’t want to be called today. I doubt there are many sitting around, saying to themselves, “I miss those calls…I feel so lonely.”

For those of you who do make those calls, keep in mind that you will rarely be seen as a person that wants to help the consumer solve a problem. You will never be seen as a consultant. Instead, you will spend most of your time trying to change the prospect’s (if we can really call them that) first impression of you as a rude intruder.

Mona Shaw of Bristow, Virginia, went at her local Comcast payment center with a hammer, smashing up some items, all the while asking, “Do I have your attention now?” After being arrested, the 75 year-old with a heart condition complained that the company had begun to switch over her phone service, then left it for four days and her without a phone. Apparently after many attempts to get the issue resolved, she resolved to take things (like a hammer) into her own hands.

As the world changes and as customers begin to have more choices, this kind of behavior will only come from the fading oligopolies (and few monopolies–check out Seth’s Blog) of the world.

If you have time for a bit of humor, check out Kramer’s rather elaborate cable man revenge scheme from one of the greatest series ever…

[youtube=http://www.youtube.com/watch?v=i86lyjM-UKY]

I love the idea of Salesforce.com! It is a perfect example of a “disruptor”, changing–practically overnight–the ways in which we think of CRM (customer relationship management), placing it on the web and offering a wonderfully scalable solution to growing businesses. And, of course, I love anything and anyone who challenges Microsoft.