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Those Pesky Customers (part 2)

This essay is continued from Those Pesky Customers.

Pop quiz.

• You need to fly from here to there. You go on the Internet and check out airfares. You find two that look pretty good. Which one do you pick?

• Or here’s another. You’re thinking about getting rid of your cell phone provider because—oh, pick any reason that suits you. You research the choices and find a slug of incomprehensible rate plans. Which carrier do you pick? Which plan do you pick?

• Or here’s a third. You’ve actually flown to there from here. You’re walking down the street talking on your cell phone yelling “what?” ever six steps. Suddenly, you need a latte. There across the street is a Starbucks. Up ahead, you also spot a local looking coffee shop with an exotic, international sounding name you’ve never seen before. Which one do you choose?

The answer to the first question is easy. If you’re a “leisure traveler,” or what we seasoned road warriors call “civilians” or collectively “amateur hour”, you go for the cheapest fare.

You’re probably buying weeks or months in advance. You don’t fly enough to have any expectations of service, and even if you do, the fact that you won’t get any is a passing annoyance vs. a perpetual irritation. Depending on the airline you pick, there may or may not be legroom back there in row 33 where you’re sitting, but you only do this once a year, so you grin and bear it.

You may be surprised at the new fees that airlines are sneaking in to increase revenue—fees to change tickets, fly standby (explain that to me), check bags, or the myriad of other charges now being levied for “services” that used to be included but are now ala carte—but with the exception of the charge for bags, you probably won’t notice. Besides, you’re an infrequent traveler, so that means you’re paying less than a day at the ballpark to take you and your family halfway across the country.

If you’re a frequent flyer, this was a silly question. If you went on the Internet to find a fare, you didn’t go to Orbitz or any of the other travel sites. You either went through your corporate travel portal, or you went straight to United or American or whichever airline you have your elite status with to try to figure out how to get where you’re going without breaking all the rules in your corporate travel policy and still get your miles. Figuring out your fare was easy. You probably aren’t staying over a Saturday and you probably aren’t making the call 49 days in advance. You really had no choice but to pay a nosebleed rate. So you pay.

With luck, you might even be able to use some of the soon-to-expire upgrade coupons you have to get a seat up front with the other swells. Except that there are 29 other travelers with your burnished status and decade long history of fidelity (with the million plus miles to prove it). The algorithm for calculating who gets an upgrade was some math major’s graduate thesis. Your fare turns out to be a BCYN57 bought on a Tuesday, but not the first Tuesday prior to 14 days prior to the date of embarkation, and besides, you’re a Pisces, so, basically, you have to sit in back with the proles . . . right next to an entire family who’s flying for less than what you paid. All this, so you can get your miles.

Hold that thought.

The phone problem is a bit trickier. It would be one thing if your cell phone number was portable—meaning you can take it with you when you change carriers, just like your land line—but it’s not. That zippy new subsidized phone the other guys are offering sure looks tempting. Put your kid’s picture right there on your screen. Surf the web at excruciatingly slow speeds. Keep your calendar on line. Voice recognition. Lot’s of other cool features taken higgly piggly from a dozen other electronic devices where they mostly work and smashed into a form factor where they mostly don’t. But hey, it’s cheap and you can talk all you want between the hours of midnight and 3 a.m. to designated members of your family who also have the same plan.

But all of this assumes you can stand giving up your existing cell phone number for a number that only a cryptographer would love. And even then you still have to figure out the rate plan. Assuming you can, there are three things that will now be true:

1. You’ll be locked in for a year.

2. Whatever plan you ordered won’t be the right one, which means you’ll need to make a change.

3. Making a change restarts your year.

If you’re a road warrior, the question as before is a silly one. Your cell phone is your life; your cell phone number is your life line. Giving that up would be harder than giving up you children . . . way harder.

Road warrior cell phone users fall into three categories: 1) the kind with cell phones their employers pay for; 2) the kind with cell phones they pay for; 3) and the kind with both kinds of cell phones. Assuming your company pays your cell phone bill, the three things you know are:

1. You hate your phone because it’s about three generations old, but you can’t get a new one because your company won’t let you.

2. If you do get a new one, you’ll have to pay for it yourself, and you’ll pay full boat, roughly the cost of a two-year old BMW because you’re not also signing up for a new plan at the same time. Even though you’ve been a high-paying customer since before they invented the StarTac, you don’t qualify for the new phone inducement because you’re not switching. You’re not a new customer. The goodies go to the phone-gypsies, not the faithful.

3. Whatever plan you’re in, it’s the wrong one, so you just get the most expensive one there is figuring that you’ll probably use the minutes.

If you pay your own cell phone bills, none of this really matters. Giving up that memorable cell phone number you got three years ago is pretty much out of the question. You grit your teeth, buy a new phone hoping that it helps with the crummy reception, or because you just have to have the cool new features (I just did all this so I know), and you lock yourself into another annual contract.

The coffee case was as trick question. Unlike the airlines, the cell phone companies, banks, and just about every other kind of company you can think of that serves lots of customers, Starbucks doesn’t do anything to entice or reward its customers. No coffee clubs. No come on offers. No hard to figure reward schemes. No artificial inducements or stimulants for making the decision to come back again. Instead, Starbucks chooses to compete on delivering a consistently excellent product and mostly consistent customer experience. The rest takes care of itself.

You can quibble with the details if you like, but the point is important and bears examination. If the first problem with customer experience is poor framing of “the problem,” the second is an insidious Skinnerian dependence that American management has developed on the use of rewards: rewards for themselves, rewards for employees, and rewards for customers.

Punished by Rewards

It probably seems unfair to pick on airlines and telecoms—the pariahs of our presently depressed economy. Both industries are capital intensive businesses that require huge outlays and long term bets. Both exist in a never-never land of quasi deregulation and must spend vast sums of money dealing with seemingly every government, committee, and concerned citizens group there is. And besides, who knew that the technology and telecommunications led bubble would go bust? And who knew that the global air travel industry would fall to its knees under the weight of the events of 9.11.01?

The truth is, nobody “knew”, but nobody should be surprised. Without diverging too badly from the central point here, the technology/telecosom run up was unsustainable, fueled in large part by a unprecedented line up of Y2K technology spending which pulled forward at least five years of capital outlays, followed by Internet mania which pulled forward another five years’ spending . . . a decade’s worth of technology acquisition jammed into about 30 months. It was a forgone conclusion that the air was going to come out, it was just a miracle that it took as long as it did.

Similarly, the plight of the airlines was not only foreseeable, but almost entirely of their own making. The events of last fall only served to accelerate the inevitable. Historically, regulation protected the airlines (and telecoms) from the effects of poor decision making. Deregulation has exposed them for what they are: poorly run businesses that survive not because they deliver superior customer value and experience, but because there seems to have been no limit to the amounts of money they used to be able to borrow, and because the alternatives available to us users were no better . . . at least until recently.

Southwest Airlines and JetBlue in the United States, and similarly configured international players like Ryanair in Europe, changed the calculus of arrogance that has historically beset the executive suites of the big air carriers. These “upstarts” prove the incompetence of the Bigs by demonstrating that it’s possible to build a trusted brand, make money, and please customers in the airline business. That the Bigs aren’t collectively worth what the taxpayers have already offered up as a bailout is the final, inexorable proof that lousy customer experience coupled with Chutes and Ladders accounting is a recipe for a first class melt down.

As Joe Brancatelli is editor and publisher of www.joesentme.com, and former executive editor of Frequent Flyer magazine says in a recent column . . .

Last year, just weeks after 9/11, Congress voted the nation's airlines a taxpayer-funded grant of $4.5 billion. On Tuesday, Delta chief executive Leo Mullin, speaking for the nation's largest carriers, went to Congress and begged for about $4 billion more. Today, when the markets closed, the total market capitalization of the nation's Big Six airlines was less than $3.4 billion.

Those statistics behoove me--and I generally only behoove when I haven't finished my morning coffee--to ask the obvious question: Why would we give the airlines more than they are worth? Or, perhaps more to the point: Why would we give the airlines more than they are worth again?

Here's a better idea: Let's nationalize the Big Six, pay off the shareholders and then put our best minds to work on a gigantic salvage project.

What I'm suggesting today is an outright government buyout of the Big Six: American (market cap of $756.8 million); United ($167.3 million); Delta ($1.417 billion); Northwest ($641.6 million); Continental ($375.8 million); and even bankrupt US Airways, selling for 58 cents a share over the counter and worth just $38.1 million. What I'm proposing is that the U.S. government, our duly designated representative, buy these suckers lock, stock, planes, ticket jackets, air-sick bags, under-seat floatation devices and barrels of jet fuel.

Without getting into a debate over nationalizing the airlines—it will never happen so why bother?—the condition of the airline industry (and the telecom industry) are beyond debate and probably beyond repair. What it will take to fix them is another topic completely. But among the many poor decisions successive groups of executives have made, one of the most destructive may prove to be the decision to go-to-market, at least in part, based on a tragically flawed assumption: when in doubt, incent. And when that doesn’t work, punish.

In this particular case, I’m not talking about executive compensation, though the nice people running the airlines haven’t done badly on that front. Says, Brancatelli:

US Airways chairman Steve Wolf and chief executive Rakesh Gangwal have earned as much as $100 million in the last five years. On Monday, they laid off 11,000 employees without offering a single penny of management givebacks or contributions. United Airlines was on track to lose $1 billion this year even before the events of September 11. It is run by men who have demonstrated their inability to lead or to manage even in the best of times. Northwest has been plundered by Al Cheechi, Gary Wilson and the acolytes of Frank Lorenzo, the man who taught airline executives how to denigrate passengers and employees, saddle carriers with debt and send profits out of the company.

Brancatelli obviously has no love for the folks running the big airlines. The fact that they’ve followed the lead of the folks running the big telecom players in enriching themselves while incinerating shareholder value, jobs, and customer goodwill (not too mention our time) should be cause for some sort of uprising.

But let us not miss the subtler and more interesting point. The big airlines have resolutely built a business based on a two pronged business model—yield management and hub and spoke distribution—that has created an operational nightmare and impenetrable offer, both of which have created an almost laughably appalling customer experience. Rather than address the mess—and this point is true of many other industries besides the airlines—airlines have instead sought to substitute rewards and punishment for any meaningful improvement in offers, customer service, or customer experience. The part that’s really strange, is that the biggest rewards and punishments are simultaneously meted out to exactly the same people, the most loyal and frequent customers: business travelers.

It’s the Experience, Stupid

The initial logic of rewarding frequent customers with points that can ultimately be redeemed for free goods seems unassailably appealing. It’s like building in a great big institutional “thank you for doing business with us.” Or is it? The problem with reward and incentive programs is three fold:

1. They’re expensive to set up, administer, and ultimately pay for. Ask the car manufacturers if they’d like to get off the subvented financing/rebate treadmill. For that matter, ask the airlines if they’d like to flush their frequent flyer programs (that day will come).

2. They wind up accruing a tremendous downstream liability for free goods and services that will ultimately create an artificial scarcity once too many of your loyal patrons start wanting their goodies all at the same time.

3. Instead of making your customers feel rewarded, they make them feel entitled, and then later, some version of antagonized.

The truth is, the kinds of incentive and reward programs I’m harping on have been designed not as thank yous, but to cover over some deep flaw or deficiency in the offer or business model. Rather than fix the problem—and fixing it may take more time, money, and effort than management thinks it has—the decision is made to simply play the behavior modification game and bribe customers into buying something, or tolerating something, they wouldn’t otherwise given a better choice.

Do it for long enough, and pretty soon you have an accounting nightmare, not to mention a business model that has effectively masked the fact that your customers basically hate your offer, but are inclined to stick around for one of three reasons:

1. They’re temporarily addicted to the rewards.

2. They don’t want the pain of the punishment they’ll receive if they switch.

3. The alternatives are just as bad if not worse.

The companies most prone to using rewards prove to be the ones most eager to dole out punishments as part of their go-to-market strategy as well. Does that sound like an odd set of words to use in connection with how a firm deals with its customers? I think so too, but how else would you describe the following?

• You offer first time or switching customers subsidized offers as an inducement to buy, but those same offers aren’t available to your loyal customers. Instead, they’re locked into a contract from which there is no ready escape, even if you deliver less than what was promised. This is true of credit card companies, banks, long distance companies, cell phone companies, airlines, and car companies to name a few.

• You advertise products and services at low prices, but prohibit your best customers from taking advantage of those offers because of the terms and conditions surrounding the purchase and use of those offers. This is the cornerstone of airline pricing.

• You advertise low prices on products that are in limited supply or that nobody really wants, subsidized by overcharging on products that are in demand, particularly by your best customers. This is a common tactic with car companies.

• You offer a list of rewards in exchange for patronage, but you make it impossible to redeem those awards due to blackout dates, constrained availability, or other forms of imposed scarcity. This is an inevitable outcome of a too successful rewards program, and a prime example of how rewards ultimately punish.

• You offer what would otherwise be attractive pricing or terms, but surround the offer with restrictions, penalties, and fees in order lock in the customer. This is a strategy followed by all of the industries already mentioned. 

The key feature in all cases is that carrots and sticks are used in equal measure to induce behaviors that the offer wouldn’t otherwise produce. Whether or not these sorts of inducements appear to work in the short term is far less relevant than the toxic long term effects on brand equity, customer perceptions, and most importantly the financial health of the enterprise. Eventually the effect of the present level of inducements will wear off. And unless you’ve subsequently figured out how to overhaul your value proposition, it’s a foregone conclusion that you’ll eventually need to raise the bar and offer more and better goodies or threaten more and harsher punishments to keep people acting the way you want

As author, lecturer, and professor Alfie Kohn says in his landmark book, Punished by Rewards:

“Except for the places where they use has become habitual, punishment and rewards are typically dragged out when somebody thinks something this going wrong. . . .What makes behavioral interventions so terribly appealing is how little they demand of the intervener. They can be applied more or less skillfully, of course, but even the most meticulous behavior modifier gets of pretty easy for one simple reason: rewards do not require attention to the reasons that the trouble developed in the first place.”

At least as far as Kohn is concerned, rewards and punishment are indistinguishable. Though he has tended to direct his thinking more towards education, parenting, and relationships inside companies, his thinking is no less applicable to a company’s dealings with customers, providers, and partners as well:

“Underlying these two features is an even more critical fact: punishment and reward proceed from basically the same psychological model, one that conceives of motivation as nothing more than the manipulation of behavior.”

 “That rewards punish is not due only to the fact that they are controlling. They also have that effect for a second, even more straightforward reason: some people do not get the rewards they were hoping to get, and the effect of this is, in practice, indistinguishable from punishment.”

In the end, rewards and punishment are two sides of the same coin, a temporarily appealing substitute for the hard work of building a superior value proposition. Assuming customers actually want what you’re selling, it seems evident that most would prefer rational, understandable terms and pricing and superior quality and service to tricky and punitive pricing and terms.

There’s an old saw in sales that says that “price matters only when nothing else does.” In other words, absent another reason to buy, customers buy price, the ultimate example of that reductionism being a true commodity like oil in a pipe or grain in a silo: in theory it’s the same top to bottom, north to south. Maybe the saw should be sharpened to say that “price doesn’t really matter because nobody understands what we charge anyway, and once they’re customers we’ll carrot and stick them while we charge the top of what the market will bear.” Or something like that.

Marketing by punishment and reward is the ultimate sign of capitulation, an admission that the company in question has run out of ideas about how to differentiate its offer, and run out of respect for the intelligence of its customers. Like somehow nobody will notice that they’re being manipulated and induced. The consequences will always, always come home to bite the inducer where it hurts.

Whether or not U.S. airlines and telecoms will ever recover from their self-inflicted wounds is important to the economy as a whole. Unfortunately, the answer is, “probably not without a lot of help from tax payers and our convoluted bankruptcy laws.” And absent some blinding flash of management insight, the goofy game of punish and reward go-to-market strategy will probably continue.

But the compulsive addiction to lousy framing and corrosive marketing tactics doesn’t need to happen where you work as long as you’re willing to do the hard work of thinking through innovative answers to a simple proposition: Let’s assume our customers are smart enough to recognize real value when they see, will pay for it if we deliver it, and will keep coming back if we don’t treat them like cattle. Now what would we do?

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Last modified: 05/03/06