Category Archives: Sales strategy

Is Maximizing Shareholder Value Poisonous?

If you grab your favorite marketing book and boil away process diagrams, statistics, and literary fluff, just two words will remain: create value.  Easy-sounding advice, but for most executives, it’s wicked hard. An ideal place for opportunists to step in and promote simple answers and quick remedies.

Business leaders have an insatiable appetite for how-to’s on value creation. And they get a nonstop barrage of erudition from practitioners, self-anointed experts, and academics who cobble salads of trendy verbs, nouns, adjectives and industry jargon, producing inscrutable sentences to solve the insoluble. Maximize/Optimize/Leverage [fill in words]! Measure this! Control that! Be laser-focused on [name of thing]!

Some recommendations show great insight. But others are obvious admonitions and bland platitudes hawked as panaceas, hacks, and fixes for whatever strategic impediment wanders into a CXO’s crosshairs. Useful or not, many are shamelessly aimed at a goal few have dared to question: maximizing shareholder value.

Until now. People have started to recognize that maximizing shareholder value has a central role in harming other stakeholders. The problem is growing. In the name of maximizing shareholder value, crucial employee benefits are being slashed, workers and contractors are hired and churned at whim, and producers with sketchy labor and supply chain practices are awarded contracts – as long as they maintain the highest quality at the lowest cost. Who cares if the widget was made in a firetrap factory by laborers required to work 80-hour weeks, with no overtime pay differential?  Magnanimity and fairness, once emblems of corporate pride, have been expunged from C-Suite vocabulary. Hey, stock prices don’t increase without trade-offs!

Customers are suffering, too – mentally, physically, and financially. Faulty product designs cause injury or death, as we saw recently with GM and Takata. Companies weaken customer service, often under the guise of improving it. “As part of our commitment to our loyal customers, we are now automating . . .” Every customer support rep I’ve spoken to this year has dutifully reminded me that I can take care of my transaction or inquiry through a website. “I can step you through setting up a profile, if you like . . .” Part of the script, I suppose, but what a humiliation to be required to pull the rug out from under your own job, one conversation at a time!

With public trust in corporations waning, a new type of social-media superhero has emerged: the “disaster specialist,” to rush in post-debacle and patch things up with aggrieved customers. They bring “field-tested industry best practices.” Reassuring to know, if you’re prone to repeating widely-publicized mistakes. And when employee morale tanks, a different group of consultants waits at the door, promoting “surefire” ways to rekindle worker passion. Meanwhile, in the executive office, all’s well. Why worry, when your stock price streaks on a heavenly trajectory? There’s a hefty bag of bonus money waiting at the end of the rainbow.

This is a perverse system, in every sense of the word. In the name of maximizing shareholder value, companies routinely decimate their vital infrastructure and brand equity, then pay steeply to repair and rebuild. Some companies complete this circuit more than once. “The non-investor stakeholders? Let them eat cake!”

Maybe if we humanized those likeliest to get hurt, things could improve. For starters, we should stop calling investors, employees, customers, and vendors stakeholders, and instead refer to them as people. “It would be a funnier story if it weren’t for the tragic aspects of American capitalism in the 21st century,” wrote Matthew Stewart in a Wall Street Journal review of Duff McDonald’s book about Harvard Business School, titled The Golden Passport (Schools of Mismanagement: a Modern Business Education Provides Theories and Metrics But No Moral Center, April 22, 2017).

How did this happen? Stewart writes that in the 1980’s, Harvard Business School “suddenly embraced the notion that managers are just a shareholder’s idea of roadkill – and that it is positively bad for shareholders to possess anything resembling a moral conscience. If there is a villain painted in a single shade of black in Mr. McDonald’s version of history, it is Michael Jensen, the economist and Harvard Business School professor who supplied the intellectual rationalizations for the leveraged buyout boom, the CEO compensation boondoggle, and the rampant financialization of the economy. In Mr. McDonald’s tale, Mr. Jensen shows up ‘spewing out ridiculous blanket claims such as . . . “shareholders gain when golden parachutes are adopted.”’ Forty years ago, I drank the same Kool-Aid as an undergraduate business student.

For his part, Jensen was influenced by an op-ed article by Milton Friedman that appeared in The New York Times Magazine on September 13, 1970 (A Friedman Doctrine – The Social Responsibility of Business is to Increase Its Profits) that has become “the most read, misread, and referenced article ever written by a Nobel Laureate economist.” wrote James Heskett (Should Management be Primarily Responsible to Shareholders?, Harvard Business Review, May 9, 2017). “And It’s still being argued today. Friedman argued that the best way for managers to contribute to the social good was by maintaining a single-minded focus on profit, acting as agents for shareholders who put their capital at risk investing in their companies . . . Of greater importance than the issue posed in the article’s title was the proposition that followed: Because shareholders are owners of a corporation, professional managers and directors are their agents, primarily responsible for carrying out their wishes and creating value for them.”

According to Stewart, Harvard Business School produced “magic sticks that promised to answer every human need with a handy spreadsheet. In the more recent chapters of the history, the scariest parts are where the faculty take the spreadsheets off campus.” Among the locations Stewart is referring to is the customer-facing side of business. The retail sales floor. The Point-of-Sale terminal at Target, Home Depot, and Walmart. Online commerce. B2C, B2B and B2G. Neighborhoods monitored hundreds or thousands of miles away by wonky marketers and data scientists using predictive analytics dashboards.

Friedman’s and Jensen’s ideas have permeated into a “river of self-love that is America’s management-ideology complex,” as Stewart describes it. Every day, putrid bubbles of pomposity rise up from the sediment: United Airlines drags a paying passenger from one of its planes, initially defending its action. Wells Fargo systemically exploits its customers and employees so its president and senior managers can receive multi-million dollar bonuses tied to stock price. Theranos coerces its employees into silence to conceal the dangerous technology flaws in its widely-installed blood assay equipment. This is Mr. Friedman’s “single-minded focus on profit” at work. If he were alive today, Friedman would object to my characterization. “There is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud,” he wrote. It took society nearly fifty years to fully recognize that Friedman’s view had great potential for harm. Today, many people simply ignore every word he wrote after profits. No doubt, some believe his sentence ends with that word.

In the 1990’s, the privately-held company I worked for was acquired by a firm traded on the NASDAQ, and a massive cultural shift overtook the sales organization almost immediately. Some salespeople who regularly provided great support for their customers became pariahs for not making goal. They were flushed, to use the indelicate vernacular of the profession, meaning they were fired. “Everything’s changed,” we were regularly reminded at our monthly sales pep talks. “Investment analysts are looking closely at our revenue performance, and it’s imperative that we hit our number every quarter.” Did our buyout and concomitant obsession with satisfying the analysts’ revenue expectations increase customer satisfaction? Did it motivate the company to invest more in customer support? Did it improve morale? It’s a fallacy to believe that on-target revenue production means employees and customers are happy, or that “top revenue producers” have delighted customers.

Should we replace maximizing shareholder value as management’s objective? If so, what goes in its place? The core issue is allegiance. “Harvard Business School Professors Joseph Bower and Lynn Paine propose that the primary allegiance of managers and their boards should be to the health of the corporation, not the maximization of shareholder value [emphasis, mine]. The rationale for this includes the arguments that managers can be held legally accountable while shareholders ‘have no legal duty to protect or serve the companies whose shares they own,’” writes James Heskett. And it’s immaterial whether investors have morals or personal integrity. Under maximize shareholder value, governance is not automatically granted a role in how companies are managed. In fact, governance can threaten shareholder value. In business, there’s no such thing as an immutable truthEven the notion of shareholders as owners of a company has been called into question.

The widespread practice of prioritizing shareholder value maximization seems odd, given the ambiguity over their role and rights in the development and implementation of corporate strategies and tactics. This becomes especially problematic when ensuring high returns to shareholders exacts heavy costs on others who are similarly vital for creating value.  For example, decisions that benefit shareholders, such as increasing short-term profitability through downsizing, can be catastrophic not only for customers and employees, but for the communities and the ecosystems of enterprises that depend on them to thrive. To make financial ratios more attractive, companies often reduce or eliminate essential long-term investments in research and development. In some cases, a company’s most valuable assets can be sold or leveraged to provide investors with immediate, substantial financial returns, while jeopardizing a company’s overall vitality. Few could argue that outcomes for customers, employees, and suppliers are fairly protected under this system.

If maximize shareholder value is so bad, why have so many companies embraced the idea? First, companies need investment capital to launch, grow, and fund new development. Those who put their money at risk deserve to be rewarded – and should be. Second, according to Heskett, “One reason the theory has predominated is that it is simple and straightforward. Shareholder value is easy to measure. Agency theory [the idea that a company’s managers and directors are responsible for carrying out the wishes of an organization’s owners and shareholders] simplifies the mission for managers; they need only serve one primary master [emphasis, mine].”

The problem is, converting to another corporate edict – one that is ostensibly healthier, more egalitarian, and more long-term focused – is complicated, as this passage from NCR Corporation’s annual report, excerpted from an article, Two points of view: The Point of Shareholder Wealth Maximization, illustrates:

“. . . board of directors no longer believe that shareholders is [sic] the only constituent to whom they are responsible”. (Wang, Jia and Dewhirst, H. Dudley, 1992). Explicitly, shareholder value maximization is not the only goal of the company, a company can’t do well without caring the interests of customers, suppliers, employees, or government environment . . . Stakeholders are constituencies who play an important role in the fortunes of the company. Their primary mission is to create value for stakeholders.”

That can work when the activities involved in value creation for all stakeholders are harmonious and aligned. But they are not. A point that Michael Jensen picks on:

“Stakeholder theory effectively leaves managers and directors unaccountable for their stewardship of the firm’s resources . . . plays into the hands of managers by allowing them to pursue their own interest at the expense of the firm’s financial claimants and society at large. It allows managers and directors to devote the firm’s resources to their own favorite causes – the environment, arts, cities, medical research – without being held accountable.”

I think his worry that managers will pursue disparate goals like aiding environmental causes or solving world hunger is overblown. Isn’t that the role of leadership – to keep everyone in the organization on the same page, so to speak? Here, Jensen backpedals, and provides a tiny concession:

“But . . . No company can create great value for its shareholders without stable growth of revenue, which comes from the relationship with customers, suppliers, bankers or government and so on.”

I agree with this last point. But I also recognize that with diminishing consumer trust, growing wealth inequality, and information power skewing back to corporations, Jensen and I are looking at business through the same rose-colored glasses.

Society cannot assume that by focusing on fulfilling the interests of shareholders we will produce consistently benign outcomes for others. We need something better than maximizing shareholder value as a managerial marching order. I’m just not sure exactly what it should be.

Will Today’s Essential Sales Skills Become Obsolete in the Smart Machine Age?

In 2015, nearly four million babies were born in the United States.  Today they are toddlers, and many will be asked what they want to be when they grow up. Expect hesitation. The question will not be as easy to answer as it was for my generation. By the time these kids hit twenty, many of the jobs their parents and relatives performed will have vanished.

According to author Edward Hess, professor at UVa’s Darden Graduate School of Business Administration, about half of all current US jobs will be displaced by 2040. His recent book, Humility is the New Smart, cites a 2013 study by Carl Benedikt Frey and Michael Osborne which examines the impact information technology will have on labor and employment. Frey and Osborne estimate that as many as 80 million US workers will be directly affected during this upheaval.

People may disagree with these dire predictions, but it’s hard to deny the profound influence that the Smart Machine Age (SMA) will have on how people will work, and on how many will be working. Nascent developments in artificial intelligence, robotics, and driverless vehicles show great promise. But for society and the labor market, not every outcome will be benign.

If half of today’s jobs will be displaced, which ones will endure? That’s hard to say, but right now, if a machine or algorithm does what you do, it’s time to dust off your resume, and pray that the software that judges it will respond favorably. There’s more displacement coming. In an article, Automation and Anxiety: Will Smarter Machines Cause Mass Unemployment?, The Economist magazine offers a glimpse:

“. . . most workers in transport and logistics (such as taxi and delivery drivers) and office support (such as receptionists and security guards) ‘are likely to be substituted by computer capital’, and that many workers in sales and services (such as cashiers, counter and rental clerks, telemarketers and accountants) also faced a high risk of computerisation.”

In the SMA, jobs that are easily substituted by computer capital won’t be highly paid, and there won’t be much need for workers to do them, either. Yet, there’s hope. Smart machines and AI remain persistently cruddy at performing a myriad of valuable skills. Hess believes that the ones that will endure “will require high-level thinking, creativity, and high emotional intelligence. The consensus view is that humans will be needed to perform those skills that either complement technology, or constitute what machines can’t yet do well, and that list includes critical thinking, innovative thinking, creativity, and the kind of high emotional engagement with others that fosters relationship building and collaboration.”

Given Hess’s prediction, sales professionals can be forgiven for feeling a tad smug.  After all, no profession better exemplifies this rare combination of abilities. At least that’s the message we repeat to ourselves. Such “killer skills” are consistently mentioned whenever a salesperson is honored, recognized, or rewarded for high revenue production. But before anyone gets bullish and puts a deposit on a designer surfboard or a Ferrari GTC4Lusso, a sobering thought: the SMA has already nibbled away low-level jobs in sales and retail. Ominously, technology has a pattern of progressing from nibbling to gnawing, before becoming a full-on feeding frenzy. Temptation confronts senior executives every day. You can’t find a CFO on the planet who is unaware of the ratio of Sales, General, and Administrative costs to overall revenue at his or her company. And the number is seldom “good enough.”

Sales survivors who believe their skills will be coveted into perpetuity might want to reassess their hubris.  The “essential” skills that portend success today won’t be especially helpful in the SMA. In fact, for a variety of reasons, some will become liabilities. First, the nature of work itself will change. Traditional employees will become outsourced contractors. Goal-directed teams will rapidly coalesce and evaporate just as quickly. Decision processes will become more opaque. These developments fundamentally change how goods and services will be sold. It doesn’t matter whether the product is industrial pumps or property management services. Second, strategic success – and its measurements – will undergo massive change. It won’t be expressed simply in terms of revenue. Consequently, sales enablement will become much different.

The New Mental Model. Success in the Smart Machine Age favors companies that adopt what Hess calls a “new mental model.” Today’s sales organizations champion some skills that will be valued in the SMA – but others that are currently popular will get in the way.

1. Legacy model: individuals win

    SMA: teams win

For many decades, sales forces have been designed, staffed, and managed under a model where reps are “individual contributors.” The concept permeates everything from culture to process to compensation to hiring and professional development. Today, individual quota achievement as the key metric of job success. In the team-oriented SMA, that model creates substantial risks.

2. Legacy model: play cards close to the chest

    SMA: transparency

While Hess is referring to the organizational tactic of hoarding information, sales operations have long engaged in this practice. When it comes to taking responsibility for activities on the customer “front lines”, corporate boards and outside departments are reluctant to get involved. “What happens in Sales stays in Sales!” In the SMA, revenue generation will become a key part of every department in the company – from HR to Legal to IT – as well as Marketing and Sales.

3. Legacy model: Highest-ranking person can trump

    SMA: Best idea or argument wins

The person who coined the aphorism, “[Stuff] flows downhill,” probably worked in Sales as a “direct report.” In the SMA, titles, job description, and tenure won’t matter as much as the quality of an idea.

4. Legacy model: Listening to confirm

    SMA: Listening to learn

Today’s sales rep listens for confirmation. Sure, sales pundits talk a good game about why salespeople need to “shut up and listen,” and how “telling is not selling.” But today’s sales managers and coaches still goad reps to focus on listening for “trigger events” and “buying signals.” Today, listening to learn without having a specific sales goal in mind is a luxury. In the SMA, it will be a necessity.

5. Legacy model: Telling

    SMA: Asking questions

A bright spot for the sales profession’s evolution into the SMA. Asking questions to expose the truth has been an enduring part of sales culture.

6. Legacy model: Knowing

    SMA: Being good at not knowing

This element represents prominent awkwardness for sales professionals. Today’s sales culture insists that salespeople possess business knowledge, industry knowledge, competitive knowledge, best-practice knowledge, and product knowledge, not to mention common sense and street smarts.  “Know everything you can about your customers!” For reps, admitting a knowledge gap isn’t a career-enhancing move. Hess believes this unattainable interpretation of knowledge is becoming obsolete. “In the SMA, Old Smart will become the new ‘stupid.’ . . . NewSmart is a new definition of human smart that reflects the increasing cognitive capabilities of smart machines and is measured not by quantity – how much you know – but by the quality of your thinking, learning, and emotionally engaging with others. NewSmart is not about always being right, being perfect, and knowing more than others.”

7. Legacy model: IQ

    SMA: IQ and EQ

Another bright spot! Building rapport has long been considered an essential skill for top producers.

8. Legacy model: Mistakes are always bad

     SMA: Mistakes are learning opportunities

Sales organizations aren’t forgiving about mistakes, which range from screwing up a demo to failing to get an appointment with a C-Level executive to losing a deal. That culture makes them very weak on learning. “Just move on . . .” A terse, but all-too-common synthesis following a failed revenue opportunity. In the SMA, successful companies will be more open to admitting mistakes, and using knowledge to prevent them in the future.

9. Legacy model: Compete

     SMA: Collaborate

It’s nearly universal in sales organizations for reps to be indoctrinated with competitive spirit. And not just us against rivals, but you against each other.  In almost every organization, salespeople are ranked against their peers. There are monetary bonuses and other perks provided to “top revenue producers.” Reps are lauded when their individual accomplishments merit recognition – but rarely appreciated for leadership, let alone encouraged to lead. Evidence? A verbatim job description from a website that typified many I examined: “This is an individual contributor position that will not coordinate the activities of others.” In the SMA, sales teams will operate as teams, and not just be referred to that way.

10. Legacy model: Self-promote

       SMA: Self-reflect

“Customers buy from people – not companies!”  Today, removing self-promotion from selling compares to the result when helium is removed from a “happy birthday” balloon. The message is still communicated, but not nearly as well. How will sales professionals adjust to the introspection needed in the SMA? I’m not sure. Maybe a good start would be to subdue the ethos that everything a rep does centers on him or her making quota.

Does the advent of the SMA mean that hiring executives need to discover skills in sales candidates that were previously not considered predictive of success? Emphatically yes, if they believe that buyers and sellers will engage differently, and that the definition of success will extend beyond an individual’s percent-of-goal to include outcomes not previously measured or rewarded.

In 2037, a sizable portion of the four million babies born in 2015 will be newly-minted college graduates – or at least the product of what we now call post-secondary education.  As we progress further into the SMA, will most companies rely on uniquely human skills to generate revenue? Will AI become smart enough to substantially cannibalize the roles of legacy sales hunters and individual contributors? Will “pure” sales roles even exist?  Fun to ruminate on, but hard to predict. As we enter the SMA, the only certainty is that the most valued job skills – the ones likely to provide health, happiness, and prosperity – won’t be the same as today.

Additional resource: for related articles about Professor Hess’s May 16, 2017 lecture at the Darden Innovation Summit, please click here.

 

Learning: Does Your Sales Culture Lead – Or Get in the Way?

“Quit allowing your salespeople to make any excuses.”

This shiny emblem of willful ignorance carries a clear message: “Talk to the hand, ‘cause the face ain’t listening.” But under this noxious edict, some learnings thrive. For management, it’s how to be close-minded. And for salespeople, it’s that higher-ups don’t care.

Low-productivity sales organizations don’t just happen – they’re built on demands like this one. No-excuses cultures crush the ability to learn – a significant risk for revenue achievement. Knowledge impediments rank high with other selling risks that receive much greater attention – and most sales organizations unwittingly construct insidious barriers.

No excuses foists bad outcomes on a sales organization. For example, “Charmaine,” a software sales rep in the East region lost a major opportunity because her product lacked several features her competitor provided. The issue came up more than once in her client meetings, and her prospect told her it was a deciding factor when the buying committee selected her competitor.

But Charmaine’s boss constantly chided her to quit giving excuses and to “sell what we’ve got.” So, when the sales team met to discuss the revenue pipeline, Charmaine preserved the no excuses mantra, and didn’t share the problem with her manager. She didn’t share it with anyone.

At the same time, Charmaine’s competitor learned why his company won the deal. Predictably, he told other sales reps at his company, and anyone nearby who cared to listen. Which was everybody. From there, his company’s marketing department took the reins and proselytized the feature advantage to its global sales organization, its partner community, and its prospective customers.

The story doesn’t end there. No excuses claimed its next victim in the sales territory right next door. Charmaine’s Midwest colleague, Mike, faced the same competitor in a similar account. But he had just joined the company, and had no knowledge of Charmaine’s experience. Mike got clobbered, and lost his deal, too.

When Mike held his account review, his boss made a dutiful note, straight from the well-worn company Sales Playbook: “Rep failed to adequately differentiate our product from competitive offering.” More ignorance. As much as anything else, what lost the deal for Mike was a company culture that prevented knowledge sharing by championing “Talk to the hand!”

No excuses closed mindedness is just one way that sales organizations stifle learning. Edward D. Hess, Professor of Business Administration at UVa’s Darden School of Business, and author of a new book, Learn or Die, identifies other top learning inhibitors. Here’s how they infect sales organizations:

1. Complacency. “Our compensation plan is spot-on. I don’t see any need to change it,” one VP of Sales proudly told me. But if you asked members of his sales team, the package was way off target. Many reps were thoroughly dissatisfied with its complexity, and with the difficulty they experienced reconciling their commissions.

2. Fear of failure or looking bad. “Just move on!” – for many sales managers and reps, that’s a loss review. Meanwhile, wins are dissected with great zeal.

3. Intellectual arrogance. “Here’s everything you’re doing wrong and a list of what you need to do differently and you know now because I told you that’s why!” When a low-producing rep is put on “Plan,” managers assume the rep is un-motived, even stupid. So they behave didactically and squander the opportunity to learn from the rep’s perspective.

4. Emotional defensiveness. “That was the only pricing choice I could make, given what was known at the time.” “Emotionally, we are generally ‘defensive thinkers’ seeking to defend our self-image and our views of the world. That is our humanness,” Hess wrote in a 2014 article, To Get Ahead Today, Learn How to Learn.

Sales cultures block learning with other impediments, unique to selling:

1. Internal contests. Sure, they generate motivation, excitement, buzz, and enthusiasm. But they also encourage salespeople to hoard knowledge and know-how like a junkyard dog guarding a food bowl.

2. Focus on the machinery inside the sales funnel. A friend recently told me, “not looking is just as bad as not knowing.” He’s a cardiologist, and his point was that some serious conditions are missed even as they happen in full sight. Almost every VP of Sales knows his or her company’s sales funnel conversion rates. “28% of our leads convert to sales, so we’re right on target.” But few understand what caused 72% to exit the funnel.

Learning cultures don’t spontaneously generate. This article recently bubbled into my news feed: The 2016 Sales Must-Read Books: Build a Learning Culture. Wouldn’t it be great if by reading books, we could achieve this result? In reality, establishing a learning culture takes much, much more. “It is critical that the organization’s managers and leaders have learning mindsets . . . Paying more attention to the managerial mindset can help in the transition to a learning organization,” Hess writes. Reading books from sales thought leaders can improve sales performance, but not if companies allow learning inhibitors to permeate day-to-day sales operations.

Ways to create a learning sales culture:

1. Expose and extinguish Theory-X beliefs and attitudes wherever they lurk. Examples: “being nice to employees means they will take advantage of you,” “employees should feel lucky to work here,” and “employee-centric practices are inconsistent with high accountability.” [Hess]

2. Rethink what successful sales achievement means. That includes possibly re-defining it from revenue achievement to quality of customer engagement, and establishing metrics accordingly.

3. When conducting sales meetings, encourage candor, and be willing to confront facts, even when they are not pleasant.

4. Establish a meritocracy of ideas rather than acquiescing to opinions based on job title.

5. Champion intelligent decision making, while giving permission to fail.

6. Encourage members of the sales team to maintain a healthy skepticism.

7. Let go. “Smart, motivated people let go of decision making,” and trust subordinates to make worthwhile choices, Hess said. That means letting them learn, and not feeling personally threatened by their success.

Ego: Great to have, but for learning, check 95% of it at the door. When it comes to instilling a passion for knowledge sharing and intellectual development, sales cultures have a long way to go. A perpetual deterministic attitude frequently blocks the way: “We’re carrying a $200 million quota. Don’t tell me how you aren’t going to make your number – I want to know how you are!” Sure, we must create and execute a plan, but with “Don’t tell me . . .” I see a hefty chunk of knowledge, squished.

In a symposium I attended for the UVa’s Darden School in Virginia on April 11, 2016, Hess called out seven organizations known for exemplary learning practices:

Google
Amazon
Bridgewater Associates
IDEO
W. L. Gore
Pixar
US Special Operations Teams

The last one especially interests me. In the places where Special Ops conducts its business, imagine how things would go if the learning impediments common in sales prevailed. Most likely, there would be plenty more failures to talk about – and a lot fewer successes.

The Difference Between Loyalty and Habit – and Why It Matters!

If you ask me to define a word, I usually start by describing what it is, or what it means. “A screwdriver is a hand tool used for turning screws and bolts. Also good for opening paint cans. Also, a cocktail made from vodka and orange juice.”

Loyalty and comfort are different. These words are better understood by grasping what they are not. The way William Gass described comfort in a 1986 New York Times book review of Home, by Witold Rybczynski:

“. . . . comfort means . . . the absence of awareness. The air is perfect when it isn’t noticed; in tepid water my finger cannot distinguish the water from itself; in a comfortable chair, without being numb, I enjoy the lack of feelings in my back and rump. Each performance, like virtue, is an unconscious habit. In the zone of the mind, an idea I can serenely take for granted, which seems certain and remains unchallenged, is like a custom recliner where the mind may snooze. My spirit, likewise, prefers familiar surroundings; it is at home and without anxiety in its own neighborhood and country. I go out of doors there as calmly as I go to bed. In addition, comfort, ideally, has no consequence but continued comfort; the padded chair is not supposed to postpone our back pains until tomorrow. Finally, if I become self-conscious about my comfortable condition, the snug swiftly becomes the smug while mind and spirit turn arrogant, dogmatic and parochial.”

In other words, concentrating on comfort makes us less comfortable. Loyalty, a form of mental comfort, has similar properties. Loyalty is a reflexive choice, absent insight. Loyalty enables consumers to bypass circumspection, reach for their wallets, or to strait away click on the Buy Now button. When we dig into reasons for loyalty, we become less loyal. For example, when we understand that we buy Product X because it’s bigger, faster, stronger and cheaper, we start to wonder, which alternatives have superior attributes to Product X? That sets off a deluge of comparison shopping, which makes marketers tear their hair out and scream for help.

Consultants to the rescue!
Experts sell executives on a panacea for the problem:  keep fixing, improving, tweaking, and changing their products. And when those tactics sputter or stall, they hawk the merits of implementing the mother of all projects: transformational change. This assures another few years of steady, billable work.

Unfortunately for companies, these investments can be self-defeating. Anything that causes habituated customers to stop and think imperils the probability of repeat purchases. “Without a value proposition superior to those of other companies that are attempting to appeal to the same customers, a company has nothing to build on,” A. G. Lafley and Roger Martin wrote in a Harvard Business Review article, Customer Loyalty is Overrated (January, 2017). “But if it is to extend that initial competitive advantage, the company must invest in turning its proposition into a habit rather than a choice.”

If you’re a habit, then someone stopping to think becomes your arch enemy. “We don’t claim that consumer choice is never conscious, or that the quality of a value proposition is irrelevant. To the contrary: People must have a reason to buy a product in the first place,” Lafley and Martin say. The problem is, once consumers have made a choice, vendors don’t usually nudge them to a marketer’s holy grail: ingrained, reflexive action. What Lafley and Martin describe as “an ever more instinctively comfortable choice for the customer.”

Oddly, vendors seem resolute on forcing their customers to stop, and think. An example: Don’t Market to your Customers; Educate Them Instead. Or, “we’re excited to announce some major changes to our product line.” Why do marketers give customers such easy chances to reappraise their preferences? I’m not sure. Maybe they don’t know when it’s a mistake. Maybe they don’t believe in the competitive power of sameness. Or, maybe they don’t expect that in their zeal to change things up, a measurable amount of revenue will sail out the window.

Buying into Lafley and Martin’s ideas requires recognizing that ultimately, driving customer habit, rather than loyalty, is key to sustainable revenue. “If consumers are slaves of habit, it’s hard to argue that they are ‘loyal’ customers in the sense that they consciously attach themselves to a brand on the assumption that it meets rational or emotional needs.” That pithy sentence upended a ton of why-you-must-build-customer-loyalty hype that I’ve read online in the past 12 months.

Innovate, and die! MySpace versus Facebook illustrates this contrast. To grow its social network platform, MySpace tinkered with what Bloomberg Businessweek called “a dizzying number of features: communication tools such as instant messaging, a classifieds program, a video player, a music player, a virtual karaoke machine, a self-serve advertising platform, profile-editing tools, security systems, privacy filters, Myspace book lists, and on and on.” I never used Myspace, but I gather that if I logged on four times each day, I would have needed to re-learn the website’s navigation each time. Facebook, on the other hand, studiously avoided building habit breakers into the user experience. The rest is history. “The real advantage is that to switch from Facebook also entails breaking a powerful addiction,” Lafley and Martin said.

“The essence of brand loyalty is, customers have to remember you and what you stand for,” Sampson Lee wrote in a blog, Stop Trying to Eliminate Customer Effort . When it comes to brands, he might be right. But for product purchases, I don’t care that people remember what I stand for as much as I care that people just remember my product.

Still, I find loyalty and habit hard to tease apart. In formulating a working definition of loyalty, I made two categories.

Category I – Sincere, genuine customer loyalty. The kind of loyalty that’s unencumbered by noodling numbers on a spreadsheet, less bothered by “justifying the business case” and “Show me the ROI!” The kind of loyalty that just oozes, “Don’t think – buy!” Call it haboyalty or loyit – whichever you prefer. It contains these essential elements:

Memory. Whether through a capability, design, packaging, acquisition experience, or something else, repeat purchases only happen when customers remember a unique attribute associated with the product or service.

Habit. Growing and deepening buying habits will improve the probability of follow-on revenue.

Inelasticity. Loyalty is not loyalty if bonds are easy to rip apart. In the words of an actual consumer: “I drive a 2016 Lincoln MKX. I only look at Fords [Lincoln is a Ford Division]. My dad worked at Ford, and I have deep loyalty to the Ford Motor Company. I look for a car that’s a little nicer and has got enough room for my golf clubs but isn’t sloppy big. The MKX is sort of a mini-SUV, though it’s not an SUV.”

If you know which famous person said this, give yourself a pat on the back. It was Microsoft’s Steve Ballmer. Not exactly your consumer every-man, but he could be. I sense that his loyalty involves commitment. Love, maybe? Regardless, Ford can reliably forecast selling at least one unit of this ugly car next year. Ballmer’s not a candidate to jump from Ford to buy a Cadillac Escalade  – or any other brand.

Category II – Contrived loyalty. I use this term in deference to marketers who still like to think of their practices as loyalty-inducing, even when they are not. Some examples:

Switching costs. The blog, Switching Costs: 6 Strategies to Lock Customers into Your Ecosystem offers a helpful list for developers tasked with building shackles connecting them to their customers. “If you look closely at companies like Adobe, Salesforce, Google, or Rolls Royce, you’ll see that their dominance is no mere coincidence. Customers stay because they are locked into their ecosystems through high switching costs.” Check out the article if you want to learn more about “Base product and consumable trap,” “Data trap,” “Learning Curve trap,” Servitization trap, and Exit trap.” Trap was possibly coined by a clever content marketer, now jobless.

Loyalty clubs.
Frequent buyer points. Rewards. Discounts. Exclusive events. Lapel pins and fan gear. Nothing wrong with offering any of these to customers. But they’re marketing expenses – perks designed to mitigate the risk of customer churn. To test whether customers are true loyalists, claw back these benefits, or squish them down. Then, see what happens.

Contracts. “Terms of service are two years. Early termination subject to penalties and fees.” It’s a stretch to regard adherence to contract terms as loyalty. But the customer-retention metrics look great on the marketing dashboard!

In another swipe at a sacred marketing platitude, Lafley and Martin wrote, “The death of sustainable competitive advantage has been greatly exaggerated. Competitive advantage is as sustainable as it has always been. What is different today is that in a world of infinite communication and innovation, many strategists seem convinced that sustainability can be delivered only by constantly making a company’s value proposition the conscious consumer’s rational or emotional first choice. They have forgotten, or they never understood, the dominance of the subconscious mind in decision making. For fast thinkers, products and services that are easy to access and that reinforce comfortable buying habits will over time trump innovative but unfamiliar alternatives that may be harder to find and require forming new habits.”

Habit versus conscious choice. The boundary between Category I Loyalty and Category II Loyalty is not as crisp and clean as it sounds. There’s fuzziness and overlap. But marketers should not allow themselves to become confused. The former involves de-emphasizing rational choice. The latter means repeatedly reminding customers to stop, think, and decide.

Longues habitudes de vie! ¡Viva los hábitos! Long live habits!

Personalization: Gateway to Dystopia

Back in the ‘90’s, Robert, a project manager at a systems integrator, asked me for some technical guidance about automated identification. “I want to track people,” he said. “Basically, I want to know when a person enters a room, when he exits, when he’s out in the hallway. Wherever a person is, I need to track it, and to know.”

“That sounds like a prison!” one of his colleagues quipped. The colleague was right. Robert’s client was a correctional facility, and the need was not trivial. Robert shared many reasons for keeping tabs on an inmate’s whereabouts, 24/7. To achieve his goal, I helped him cobble a network of barcode printers, scanners and other devices. In the 20 years since, technological advances and the IoT (Internet of Things) has immensely simplified this task, making it both inexpensive and quick to deploy. I predicted this. At the time, uses for RFID and related technologies were rapidly expanding. I also anticipated that consumers would similarly become coveted targets for surveillance. But in my wildest imagination, I never expected how compliant they would be in allowing others to monitor them.

Surveillance carries a sinister ring, unless, I suppose, you’re a professional spy. Understandably, marketers skate around the term whenever they create ads, web pages, press releases, and other content. Fortunately, they can substitute a related word, one that’s friendlier, with proven sales mojo: personalization. In a digital economy, that helps clear the path to the crown jewels of marketing: detailed personal records.

The sales speil for Ocean Medallion, a new wearable offering from Princess Cruise Lines, gets an A-plus for cleverness. “You don’t need to introduce yourself to your Ocean Medallion Class ship; it knows you already. Your crew? They answer your requests before you even ask them. We’re giving you more than elevated personalized service; we’re creating personal moments.”

Providing personal moments for passengers doesn’t happen without surveillance and amassing a trove of valuable personal data, and other information. Princess has invested accordingly. To track its Medallion-wearing guests, Princess equips its vessels with around 7,000 sensors. What do these sensors sense? Well, remember the prison example I mentioned. Then, let your imagination soar!

Thanks to Sting, a darker, more poetic way to express the same idea:

Every breath you take/
Every move you make/
Every bond you break/
Every step you take/
I’ll be watching you

Personalization involves feeding a ravenous data engine, and sensors provide much of the input. The output cascades through colorful displays. Throughout every Medallion-equipped ship, Carnival has strategically positioned 4,000 15” plasma screens to push personal messages to passengers. “Hi Candace! Karabela dresses are now 25% off in the women’s boutique on D-Deck.” Candace receives this information because Princess knows about her buying habits, including when she’s likely to purchase what. It also helps that Princess owns an archive of her activity since the start of her voyage, and an algorithm knows that every day around 4 pm, Candace wanders to the bar on D-Deck, ambling right past the boutique. Ka-ching! “Imagine how many more margaritas, massages and shore excursions [the company] will sell by making it so simple to book by using a Medallion on your wrist that unlocks personalization for you everywhere,” Chris Peterson wrote in a blog, 5 Things Retailers Can Learn from Booking a Smart Cruise.

Indeed. For Princess, research about individual customers starts before they embark. Thanks to social media, Princess has a ready-made repository of fungible insight. “The goal of pre-planning is learning more about our guests,” said Michael G. Jungen, Carnival’s Senior Vice President of Experience, Design and Technology  (Carnival is a Princess brand). According to a New York Times article, Coming to Carnival Cruises: a Wearable Medallion That Records Your Every Whim, (January 4, 2017), Jungen “noted that passengers would have the option of linking their medallions with social media accounts, allowing Carnival to delve even deeper . . . As Carnival designed the Ocean Medallion system inside an unmarked building here in suburban Miami, it built a replica set of staterooms, corridors and other ship facilities to test concepts. Scribbles on a monumental white board in one area contained algorithms and personalization ideas.” Examples: when you eat dinner and what you watch on TV. More? . . . Oh yeah!

Jungen and colleague John Padgett, Carnival’s Chief Experience and Innovation Officer, brought their CX and data collection skills from Disney, where they developed a wristband system called MyMagic+. Disney invested over $1 billion in the project. “The ultimate goal here,” Padgett said, referencing a Disney aphorism, “is to delight and surprise our guests.” He makes a good point. Cruise vacationers like to feel pampered. They want special seats in restaurants. They want food brought to them whenever and wherever they are. They don’t want to stress about knowing where their kids are on a massive ship. Wearable guest-tracking devices make these perks possible.

Carnival, and other companies that collect and store large amounts of customer information, explain that their motivations are benign, and that their intent is to provide consumers unprecedented conveniences and outstanding experiences, or CX. That may be true, but it’s not the full story. The same detailed digital customer profile that enables the bartender to custom-pour Candace’s Negroni also feeds finely-tuned algorithms that are superb at separating her from her money. That includes long after the cruise ship returns to the dock. For Carnival, Candace’s digital profile is a cash cow that keeps on giving. Little wonder that Carnival would like every passenger to wear an Ocean Medallion. They just don’t divulge ongoing cash flow and data monetization among the reasons.

Customers should consider what they sacrifice to experience those personal moments. With wearable devices, it’s no longer theoretical to ask which intimate details can be captured and recorded. The correct question to ask is not, “why would a company want that kind of information?” but rather, “what’s stopping them from getting it?” With over 7,000 sensors aboard a ship, I suspect very few people know where all of them are placed, or what activities they monitor. I’d start with the stateroom.

In 2012, President Obama said that “companies should present choices about data sharing, collection, use, and disclosure that are appropriate for the scale, scope, and sensitivity of personal data in question at the time of collection.” In other words, businesses should tailor privacy rules to the data itself. But when I visited the Princess website, I did not see any disclosures or policies specific to Ocean Medallion. And their latest privacy statement was updated in December, 2014, before Ocean Medallion was introduced. “Some data collected from wearables may be relatively trivial, but other data can be highly sensitive,” said Kelsey Finch, Policy Counsel for the Future of Privacy Forum (FPF), which has published a paper providing recommendations for wearable privacy practices.

Before donning an Ocean Medallion, or other wearable device, what should consumers want to know? The US Federal Trade Commission offers sensible guidelines for companies to include in privacy statements:

• identification of the entity collecting the data

• identification of the uses to which the data will be put

• identification of any potential recipients of the data

• the nature of the data collected and the means by which it is collected if not obvious (passively, by means of electronic monitoring, or actively, by asking the consumer to provide the information)

• whether the provision of the requested data is voluntary or required, and the consequences of a refusal to provide the requested information

• the steps taken by the data collector to ensure the confidentiality, integrity and quality of the data

And I’ll add a couple of my own:

• How long will the data be retained?

• How will it be protected?

For now, these guidelines unevenly used – if they are used at all. And I’m not bullish that consumers will demand that companies adhere to them. There are two reasons: first, I don’t think consumers care. Many are digital natives who are jaded about digital surveillance. And thanks to clever marketers, the “wow!” of personalization – like having a waiter just hand you your favorite drink whenever and wherever you want – supersedes consumer concerns over data governance. Please – the next type someone spouts hype about customers having all the information power, remember Ocean Medallion.

Second, Congress just emasculated the already-weak consumer protections regarding data privacy. If Trump signs the joint resolution of congressional disapproval, Internet providers are free from any obligation to get a consumer’s approval to “share or sell things such as your geolocation, your children’s information, your financial information, your Social Security Number, your browsing history, your app usage history, or the content of your message data plan . . . Internet providers will also be free to use customer data in other ways, such as selling the information directly to data brokers that target lucrative or vulnerable demographics”, according to a March 29th Washington Post article, Congress Pulls Plug on Internet Protections.

You’ve probably gathered from my polemic that I’m not a good prospect for Princess or Ocean Medallion. You are right. But if I became their customer, I suspect Princess could quickly learn more about me than maybe I even know about myself. Thanks to Congress, all it now takes is transferring personal data from my Internet Service Provider, blending it with Ocean Medallion’s personalization data, and voila! – digital gold! The worst part (or best part, depending on your perspective): no consumer disclosures are required. A chilling thought that signifies how many more miles we’ve traveled on the road to dystopia.

Surveillance enables personalization, and personalization brings customers personal moments. But those wonderful times won’t be free, and they won’t give people freedom. Being watched never does. There will always be more personal details revealed, and an accompanying monetary transaction.  Personalization delivers marketers an unprecedented ability to know customers intimately, and to hone how they sell to them.  That should give every consumer momentary pause.  Meanwhile, expect vendors to continue hawking the wonderful CX that personalization enables. For them, the value of what customers so willingly sacrifice is incalculably high.