Friday, July 25, 2008

Short Termism Rules - Or How to Screw Your Customer

One of the reasons there is more innovation in small businesses and in private companies is because they often take a long-term view. Large (particularly public) companies are the opposite. They are forever focused on the short term.

Markets dictate it. They want to know (and reward) what is happening this quarter or this half, not what the plan is for 10 years hence. And in any event, even if market pressures weren't driving it, the people in big businesses would.

The average tenure of a CEO is something like 5 years these days. Other 'C Suite' managers often last even less. They want quick 'wins' to build their reputations.

The thing about 'winning' is that is almost always involves someone losing. The losers, when it comes to short term quick 'wins' for businesses, are often customers. We know it and that's why we customers frequently resent the brands we do business with.

The easiest way to gain a quick win is to focus on cost control. Building value through innovation takes time and investment and is never as easy.

Here are three current examples of how customers are losing while businesses reap short term gain. And in the process these businesses miss opportunities to cement solid (and valuable) lifetime customer relationships.

Ads on Pay TV
Pay TV in this country has been losing money for years so its shareholders have been 'investing' to support it. These losses have been, in part, because it has taken time to build a critical mass of subscribers. For the last couple of years it has turned around and Pay TV operators are now making money. The variety and quality of programs on Pay TV has never been better and people are switching to it in droves (at the expense of Free-to-Air TV). This is the context and I am not blind to it.

I have had Pay TV for years now and so have observed the recent changes. The one that really annoys me (and, based on the extent of conversations I have heard or participated in, I am not alone) is the seemingly exponential increase in advertising.

I haven't put a stop watch to it, but my perception is that now there is the same, or a greater, level of advertising on Pay TV as FTA. So my customer experience with Pay TV has fundamentally changed. My viewing is now interrupted at a rate which is egregious. And what has happened to my subscription cost - it has increased of course!

I wish I was strong enough to cancel the service in protest. But I'm not. My favourite programs are on Pay TV. So, I feel captive. And whenever we feel compelled to put up with a situation we can't change, resentment breeds.

I don't begrudge the long suffering shareholders in the Pay TV industry finally extracting some return from their patient investment. But why didn't they do it in a way which invited customer participation and therefore provided customer empowerment. For example, they simply could have explained the situation and the need.

Even more compellingly, they could have offered me a choice - perhaps, in the same way insurance companies provide lower premiums for customers who select higher excesses, they could have offered me a stepped level of subscription rates. Maybe at twice my current subscription rate I get channels completely ad free; at 50% more I get a maximum of 5 minutes of ads an hour; at the current rate I get 10 minutes of ads an hour and at 50% less than the current rate I get 30 minutes of ads an hour.

The point is, at the moment, I am an unwilling recipient of this change; it feels very much like I am being taken for a ride - I am paying a pretty significant subscription (certainly more than I was a few years ago) AND I am now being bombarded with ads at an unprecedented level which I know is making them more money. They are making (short-term) hay while the sun shines.

I resent them and if an option ever arose I would grab it as quickly as I could. I am not a happy customer or brand advocate.

A new credit card surcharge
I have had a wireless broadband modem with one of the telco carriers for 18 months or so. I use it as a back-up when my primary access goes down. I pay a fixed monthly charge of $34 and, at their insistence when I took out the contract, that charge comes off my credit card each month.

Last month I noticed the cost was $34.22. This month it became $36.26. I investigated and discovered that last month they started imposing, seemingly without consultation or communication, a credit charge surcharge. This month, still with no apparent consultation or communication, they added a $2 charge to have my bill delivered by mail.

I'm under contract for another 6 or 7 months. So I can't get out. They know I am trapped.

I have been paying by credit card and getting paper bills since I took out the contract. These were implied terms of the contract I took out. The cost of postage hasn't increased in the time since I took out the contract and there have always been merchant fees charged to them for credit card collections. In another business I too am a merchant who collects payments from customers using credit cards, and my cost of doing so hasn't increased in the last couple of years.

So, the costs of these elements has always been the same for my carrier telco. The change is that they have all of a sudden decided to pass the costs onto me - without my consent.

I can just imagine some bright accountant in the bowels of this telco coming up with the pitch to their boss. "Hey boss, we could reap an extra $X million a year simply by levying a credit card surcharge on everyones bill. It is so small no one will notice it and even if they do what can they do about it - after all they are locked into contracts".

Short-term gain at my pain. And what disintegrates in the process? Any pretence of a relationship between the brand and its customers.

Recent rises in bank charges and interest rates
For the first time in Australia, the major banks are increasing interest rates even though there has been no Reserve Bank initiated increase in official rates. The banks argue that their cost of borrowing has increased and they have been absorbing those increases; they also argue they are not passing on the full cost of their borrowing in the rate increases. Then they ask us 'why should our shareholder's suffer at the expense of our customers?'.

This argument - 'we have a duty to our shareholders' - is one which is frequently used by organisations to rationalise any circumstance where customers are getting screwed.

What it misses is that customers are shareholders too. A corollary to this sort of notion was the basis upon which Henry Ford built the Ford Motor Company. He flew against conventional wisdom and paid his workers more, in a world where the emerging capitalist machine argued that workers should be paid as little as possible, because he knew that his car for the 'every day person' was going to be bought by his workers and people just like them. By paying them more he was creating the ability for them to become customers and therefore fuel his growth.

Back to the banks.

We have all watched as their annual profits have soared to record multi-billion dollar levels in recent years.

Thanks, in part, to the same market ructions which are causing the increase in bank's funding costs, consumers are doing it really tough. Inflation is running at a higher rate than it has done for more than a decade; consumer confidence is at a 17 year low; petrol and food prices are through the roof; mortgage defaults are at the highest rate for years and on it goes.

So, at a time when the bank's profits are at an all time high, and consumer confidence and disposable income is at an all time low, what happens - the banks start increasing mortgage rates out of step with official rate increases.

Is this more short-term profiteering at the expense of a 'captive' customer base? You bet! And it breeds the same kind of resentment already described.

What if a brave bank had come out and said - 'We recognise our customers are doing it tough; we are going to take a hit for a year or two and support them; we're going to hold rates and that means instead of delivering another x% increase in profits this year we are going to have a y% fall in profits'.

What customer (existing or new) wouldn't want to be part of that bank? They could recoup some of their cost of funding by cutting out all marketing spending for the year because their customers would become word-of-mouth advocates. In fact they would be beating off potential customers with a stick.

Of course no bank CEO would ever contemplate such an option because it would be short-term suicide.


There is real value in long-term customer relationships where customers are advocates for your brand. Many (most) large businesses sacrifice this for short-term gain. Unfortunately it often appears to work, because their customers are held captive. But it breeds resentment which must increase customer servicing and marketing costs. There is an opportunity here for small, privately held businesses to take a longer term view, do things differently and build value.

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