eCommerce Archives - Customer Strategy

November 23, 2018

#81 – Goodhart’s Law, eCommerce again, loyalty equals cost reduction, VOC program design

Maurice FitzGerald / Cost reduction, Newsletter, NPS, Strategy / bad service, Customer Experience, eCommerce, Fred Reichheld, Net Promoter System, VOC /

Goodhart’s Law and being careful about metrics, eCommerce that competes with own retail stores. Welcome to the 81st edition of my customer strategy newsletter. The five topics this week are:

Goodhart’s Law is 43 years old – We still need to be careful with metrics
Web stores that compete with physical locations – My latest experience
Latest blog posts
Notable items from other sites – Fred Reichheld, Agi Marx
Looking forward

Goodhart’s law is 43 years old – We still need to be careful with metrics

Charles Goodhart is a British economist. He remains disappointed that he is best known for something he wrote way back in 1975. His original words were not terribly inspiring:

Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.

He was writing about UK monetary policy and the point he was making was that if a particular metric, such as the M2 Money Supply, became the sole focus of monetary supply it would be made to look better, no matter what the underlying reality.

Let me try to rephrase the ‘law’. Once a single metric becomes a major focus the people being measured will make sure it improves. A good example is what happened when a new emphasis was put on crime statistics in Chicago:

In the UK someone in the National Health Service decided to measure hospitals on emergency room arrivals being served in under four hours. A bizarre result was that patients were kept inside ambulances until staff were certain that they would be treated within four hours of being taken from the ambulance to inside the hospital, when the clock started to tick. Guess what? The metric improved.

The same thing will happen if you measure individuals on NPS or CSAT scores. The numbers will improve, even though the reality may be unaffected. I recently came in contact with a situation where call center agents who had to phone customers who gave low scores were measured on those same scores. A surprisingly high (though not surprising to me) number of customers supposedly claimed they had not understood the survey and asked to have their scores changed from the worst to the best number. Success???

The message here is that you should not measure individuals on NPS, CSAT or indeed any score that they can personally manipulate. Customer satisfaction metrics are best used as collectives scores for a team or an entire organization.

Web stores that compete with physical locations – My latest experience

It is Black Friday as I write this. I have just had the opposite experience to the one I wrote about last week. The latest experience is not a good one. I have a loyalty card with the Fnac chain. For those unfamiliar with the brand, they sell books, CDs, DVD/Blu-Ray, photo equipment and electronics. For US readers, I would describe them as a combination of Barnes & Noble and Best Buy. Their weekly email update included a Black Friday deal with 18% off the 2018 9.7″ iPad. Since I have been looking for just that, I decided to pop into the Geneva retail store this morning. Surprise, they were marked ‘10% off’.

So I went to a sales person. His answer, “Oh we never know what those web people are going to do. It’s 10% off here.” Then I pointed out that the web site says I can order at 18% off and pick it up an hour later in this very store. Answer, “If they say so, I suppose you can do it, but I can’t give you 18% off directly.”

This is the exact counter-example to the one I gave last week. Your eCommerce operation cannot compete with your retail outlets. It makes customers like me think you are stupid and trying to trick us in some way. It is a well-known direct marketing phenomenon that you should not give people choices. Having different prices in-store and on the web is idiotic. It means neither price can be trusted to be the lower without checking.

Our latest blog posts

The top two on this are part of a new series on a specific aspect of strategy creation: the process of asking new questions so you can get new answers. Older posts are still available on the blog page.

Strategy: Ask new questions to get new answers – Part 2: Partners

The majority of companies have partners for at least some of their business. The three main categories of partners available to most businesses are resellers, implementation partners, and subcontractors. This blog proposes how to understand your current status with partners and what you can do to improve.

Strategy: Ask new questions to get new answers – Part 1: Customers

First in a series about the first and most important step in determining a new customer experience or business strategy: getting an accurate picture of where you are today and what could possibly be done to improve your business. The key point is that you need to ask new questions to get new answers and insights.

Invisible gorillas prove you need automated text analytics. Seriously! (7-minute read and videos about inattentional blindness)

We are awful at observation. Our brains just don’t work all that well. Various psychological experiments lead to the inevitable conclusion that our brains work hard to fit whatever we perceive to the list of things we already know about…

Notable customer experience items from other sites

Fred Reichheld: The best way to cut costs is to make customers happier

You may know Fred Reichheld as the co-inventor of the Net Promoter System and the Net Promoter Score. While he is not hugely active these days, he has just written a new article that introduces an interesting twist to his favorite theme of customer loyalty. Rather than talking about revenue growth he talks about loyal customers as a cost reduction opportunity. I particularly like his point on the potential for changing sales incentives to favor rewards for customers to stay with companies for at least 18 months. Lots of good ideas in this three-minute read here.

Agi Marx: Voice of the customer: Why you need it and how to start your VOC program

Agi wrote this detailed blog for Thematic, where she is director of marketing. I find her insights about AI, text analytics and the importance of actionable insights quite compelling. A combination of art and science is needed to avoid simply identifying problems but not what you can do to resolve them. I think this blog provides good reading for any company that is setting up a Voice of the Customer program or trying to improve what they already have. It is about a ten-minute read and you can find it here.

Looking forward

Thank you for the great feedback on the ‘ask new questions’ blog posts on customers and partners. The next one will be on competitors.

Here are links to all of our books on Amazon.com. Kindle versions are available in all stores. Print versions are available from the major stores only. If you have already read any of our books, please write reviews on Amazon.

Customer Experience Strategy – Design & Implementation

Net Promoter – Implement the System

Customer-centric Cost Reduction

“So Happy Here”: The Absurdist but Essential Guide to Better Business (Color edition)

“So Happy Here”: The Absurdist but Essential Guide to Better Business (Black & White edition)

Please share this newsletter with your friends and colleagues and encourage them to sign up for it here. I have put links to past newsletters on the subscription page. Finally, please feel free to change or cancel your subscription using the link below.

You can also email me, Maurice FitzGerald, at mfg@customerstrategy.net.

To change your subscription, click here.

November 15, 2018

#80 – SAP & Qualtrics, eCommerce, Customer Success and more

Maurice FitzGerald / Cognition, Cost reduction, Newsletter, NPS, Psychology, Strategy / bad service, Customer Experience, Customer Success, eCommerce, Net Promoter System, Qualtrics, SAP /

SAP acquires Qualtrics, eCommerce that complements retail stores. Welcome to the 80th edition of my customer strategy newsletter. The five topics this week are:

SAP acquires Qualtrics – Some thoughts about the value of the deal
Web stores need to complement physical locations – My latest experience
Latest blog posts
Notable items from other sites – Customer Success, strange customer stories
Looking forward

SAP acquires Qualtrics – Some thoughts about the value of the deal

At the time I retired from HP we were using Qualtrics as our provider for double-blind benchmark research. We did not use their customer experience software, choosing mainly to develop our own and use feedback processes built into our CRM systems. So, while their software has a good reputation, I have no personal experience with it. I knew SAP well when I worked on the global alliance team at Compaq and have tried to follow their progress at a distance since then. Last week SAP announced they are acquiring Qualtrics. You can see details here.

To me at least, the obvious question is how Qualtrics, with expected revenue of $400 million in 2018 could possibly be worth $8 billion, even with a 40% growth rate that they expect to continue. SAP has borrowed the money to make the purchase, though their net income in 2017 was about $4.5 billion.

The most important point to bear in mind is that there is only one correct way to value an acquisition target: Discounted Cash Flow (DCF). If you think something else, like ‘earnings multiples’ is correct you are simply wrong. DCF uses all expected future earnings before taxes, depreciation, and amortization (EBITDA) forever to provide a value calculation. The variables that matter most are the growth rate and the interest rate (the discount rate) used. In general, the company being acquired projects much higher growth rates than the acquiring company believes to be realistic. This leads to a disagreement on the price.

The acquiring company resolves that disconnect by designing synergies into its integration strategy. The reason the majority of acquisitions fail is that the overall integration strategy is unrealistic. The lack of realism comes from underestimating the difficulties of cultural integration and overestimating the value of synergies or how easy they will be to achieve.

Culturally, German and US business cultures are about as far apart as it is possible to be. (Source: When Cultures Collide by Richard D. Lewis.) SAP has an American CEO, and that will help a little, but not much.

Synergies fall into several categories:

Growth synergies that the companies bring to each other. More growth requires more sales people and partners. The existing sales people cannot possibly just sell the other company’s products. They already have full-time job, and software sales are specialized.
Cost synergies are reductions in people, buildings and payments to suppliers. If cost synergies have been built into the plan German labor laws mean they will disproportionately affect Qualtrics people as they are mainly located in places where workers are not protected.
Dis-synergies also exist, meaning customers or partners who will leave SAP or Qualtrics because they do not want to work with the other company.

Since such synergies are frequently insufficient to justify the acquisition price acquiring companies, driven by management hubris, jump into the fantasyland: the calculation of the supposed value of preventing a competitor acquiring the company. Such calculations are meaningless.

So… digging out my DCF spreadsheet from my M&A course at Kellogg… I can’t get to an $8 billion valuation without aggressive growth rates and at least some cost synergies. How realistic are such growth rates? It will take 18 to 24 months to find out…

Web stores need to complement physical locations – My latest experience

Someone (I don’t remember who) recently told me that water was the most critical thing on the planet because without water you can’t make coffee. This came home to me yesterday morning when our ‘bean to cup’ Delonghi coffee machine stopped working. The machine is (or was) about six years old and has been great. I quickly found a repair manual online, took it apart and determined that one of the two heating elements was no longer working. We once had a similar Delonghi machine fail while under warranty. They took more than a month to repair it. I decided to go shopping online. The situation required fast action.

I started by looking at some comparison tests on consumer sites and this took my choice down to a few models. I then used a price comparison site to determine a budget. Several of the major Swiss brick-and-mortar stores also have eCommerce sites and they were on the comparison lists, sometimes with prices that were close to the lowest. However, the main ones had one attractive feature that made all the difference. Their websites (Fust, InterDiscount, and Media Markt were the ones I looked at) all provided the stock status in each of their physical stores as well as proposing to sell online, usually with free shipping.

My need to have a new machine working the same day was paramount. I checked stock status at nearby stores for the models that interested me. I unboxed the new machine at home an hour later. Delicious experience. All too many companies that have physical locations run their eCommerce sites separately, essentially creating internal competition with lots of opportunities for disconnects. Intelligent companies have sites that complement their physical operations, making life much easier for people with urgent needs like mine.

Our latest blog posts

The top one on this is the first in a new series on a specific aspect of strategy creation: the process of asking new questions so you can get new answers. Older posts are still available on the blog page.

Strategy: Ask new questions to get new answers – Part 1: Customers

Invisible gorillas prove you need automated text analytics. Seriously! (7-minute read and videos about inattentional blindness)

Tips for communicating the purpose of cost reduction (7-minute read)

I was talking to a former colleague yesterday. He described a recent meeting where he learned that major cost cutting still continues where we used to work. The discussion made me reflect on the horrible mistakes and best practices I have seen when cost reductions are communicated…

Notable customer experience items from other sites

Neil Davey: What are Customer Success Managers and why are they so important?

Customer Success Managers started in software and have become important players in other businesses. I suppose they started in software because software businesses tend to have high margins and could afford to make the investment without being certain it would work. In HP’s $4B software business we implemented them in two sub-businesses first. The huge improvement in contract renewal rates meant that we quickly decided to implement them everywhere. Their role is to make sure customers get the return they expect on their investment. Their services are provided without charge and they do not carry sales quota, at least in what I would call a ‘pure model’. Neil’s article for MyCustomer goes into detail and I think you will find it an interesting five-minute read here.

Strange site – Apparently the customer is not always right

Some of these are far from politically correct. I think it is simply a site where customer service agents of different types simply post stories about what they consider to be bad or unreasonable customers. Some of these are funny, some sad, some frankly difficult to understand. See what you think here.