REVIEW: FLIP THE FUNNEL: Joseph Jaffe (John Wiley & Sons)

I’ve read Joseph Jaffe’s book across multiple air journeys, nationally and internationally. I agreed with the principles described and saw parallels with excellent services businesses over the past few years. However, the implications didn’t quite strike me in the gut until I realised – while writing this on board an aircraft – that the journeys I had taken with this book had also been with just one airline.

My loyalty to this airline is not because of the mileage card I hold, although their mileage programme is certainly among the best in the world. It is not because they were the cheapest or the most on-time, though they compete favourably with other comparable airlines.

My loyalty to them is because of what they did during the Mumbai floods in July 2005. Those who remember the chaos, through personal experience or through media, wouldn’t blame airline staff for abandoning their counters, and leaving the airport to try and reach home as early as they could. Certainly most of them must have felt helpless in the face of increasingly desperate passengers who couldn’t expect to depart any time soon. Jet Airways stood out as being the only one in Mumbai’s Terminal 1-B whose team felt responsible enough to stay back at the airport to be available to the passengers. Not only did they ensure that the passengers stuck in the terminal were safe, but that all waiting passengers got three meals a day! Whether or not they were flying with Jet Airways.

Now, in telling you about incident, I have closed the loop and given you a living example of the “flipped funnel” that Jaffe describes in the book.

The normal marketing funnel is described by the process Awareness, Interest, Desire and Action (or “AIDA”) which underlies the spray-and-pray approach of traditional marketing. The result of AIDA is that a lot of customers become aware of a business, brand or product. Some are interested enough to seek out the product. However the number who move on to the next stage of actually expressing desire to buy is lower, and those who actually buy are fewer still, as amply demonstrated by carts being abandoned before actually checking out.

Jaffe points out that the AIDA principle was created in times of abundant growth in the US, but is a suicidal funnel to fall into when resources are scarce. It is lopsided, with more money being spent on customers who will not buy. It is linear and does not capture the complexity of buying behaviour. It is open and incomplete because it only handles potential customers up to the point where they become actual customers, but does nothing with them thereafter. AIDA also inherently assumes customer churn, hence the opening focus on creating awareness among potentially new customers.

The alternative principles Jaffe describes are simple: getting more customers to buy from us and more often (repeat purchases), to spend increasing amounts with us (loyalty), and finally, to recommend us to their friends and associates (referrals). However, to do this requires dramatically different thinking from AIDA spray-and-pray. Jaffe’s alternative model – ADIA (Acknowledgment, Dialogue, Incentivisation and Activation) – focuses on customers more than prospects.

Acknowledging customers itself is such a major stumbling block for so many companies, such as the retailer whose front-line staff would prefer to fold and put away garments than meeting the eyes of the customer who has walked into the store. In some cases it may be about using technology effectively rather than as a barrier. When the taxi company can recognise the number you are calling from and close your order in less than 120 seconds, why does the telephone company that issued that number make you jump through burning hoops for 5-10 minutes before they will allow you to request a duplicate bill?

That acknowledgement should lead to an on-going dialogue, before, through and well after the purchase is done. This would be supported by constant incentives for the customer to buy more from you. It is not about having a loyalty programme, as Jaffe quotes studies that demonstrate that loyalty programmes alone don’t produce loyalty; in fact there are enough businesses that do not run loyalty schemes but have what can only be called fan followings.

The final link in that funnel is building that community of evangelist enthusiasts who will carry your brand message farther and far more effectively than any traditional form of marketing could. Religious organisations have known this for thousands of years – it is high time that businesses and other organisations recognised the power of the community as well.

Jaffe acknowledges that Seth Godin actually came up with the term “flipping the funnel” over 3 years ago, when he released the e-book of that name (available on sethgodin.typepad.com) primarily about using social media effectively. Jaffe, to his credit, has applied the principles more fully across the marketing and customer service process.

Jaffe recently sold his business, crayon, but has kept his title “Chief Interruptor” at the acquiring company. If you want to make your marketing really pay, you’ll find it worthwhile letting “Flip the Funnel” interrupt your normal marketing thought-process.

(This review was written for Businessworld.)

Are you being carried, or are you carrying others?

To know the answer to that question, bear with me while I take you on a short mental journey through the emerging landscape of “ethical business” and to the stories at the end of this piece. (Okay, you can cheat and skip ahead, but I would really prefer you to read through the whole thing.)

For the most part sustainability and responsibility – or “corporate social responsibility” (CSR) to use the proper jargon – is seen as more relevant to the western economies, rather than the emerging economies like China, India and Brazil.

The pressure to do the ‘right thing’ is like a carpenter’s vice, whose one jaw is public opinion and the other is regulation, together squeezing ever tighter on corporate business. Clearly, there is a significant portion of customers in western markets who are vocal in expressing their opinions on business practices that are seen as wrong or unethical. On the other side, judicial implementation of regulations is also extremely stringent.

In fact, in the last 10-15 years CSR and sustainability have become far more important to top management in western economies since the real penalties in terms of negative impact on the brand and financial penalties through regulation and litigation are extremely high. Multi-billion dollar businesses certainly have much at risk, as demonstrated by well-documented PR disasters of large brands and retailers in the last decade or so. The variety of issues they have faced has covered sweatshop factories, child-labour, product safety, food adulteration and many others.

Since the mid-1990s there has been a steady increase in CSR initiatives, or at least an increase in initiatives that are labelled under the CSR umbrella. There is no doubt that there is good intent behind many CSR initiatives.

Some of these are focussed on improving the core business processes and practices of the company, and have measurable improvement goals that also have a positive impact beyond the company itself. These can truly be called socially-responsible corporate initiatives.

However, one can’t help but question many others which are fuzzy in their impact on both within the business and outside. The motivation of this type of initiative seems to be a two-pronged PR effort: firstly to get positive PR for “good work” mostly unrelated to the business and secondly, more importantly, to avoid negative PR for poor or questionable business practices in the company’s mainstream products or services.

Lest I sound too cynical about the corporate efforts, let me say this: there is also lack of clarity and agreement in non-corporate circles about what constitutes “corporate social responsibility” or “responsible business”. The label is relatively new to mainstream management thinking and very mutable. Social responsibility, ethical business, sustainability are all terms that are broad-based, used interchangeably, and are open to interpretation which can change with the context. (I wrote about this in an earlier column “Corporate Responsibility – Beyond Babel” about 18 months ago.)

And that brings me to four separate incidents that happened recently, which are (in hindsight) neatly threaded together with a common thought process. (Thank you for your patience so far!)

The first was a discussion recently initiated by an international organisation about what could motivate Indian brands and retailers to make moves in the area of corporate responsibility, whether regulations needed to be tighter or whether it would be consumer pressure that would bring about a change. The underlying assumption – right or wrong – was that, as corporate entities, Indian retailers and brands were not sufficiently motivated to take significant and visible steps towards making their businesses more sustainable and socially responsible than their current state. The discussion was inconclusive, with many different, all potentially valid, points of view on the subject.

Very soon thereafter, I had the opportunity to participate in a dialogue with Gurcharan Das, the philosopher-author who, in his last corporate role, was Managing Director – Strategic Planning for Procter & Gamble worldwide. The dialogue primarily centred on his latest book: “The Difficulty of Being Good”. There was much debate and discussion on the wider consequence of individual actions and especially of those in positions of authority, highlighting the importance of individual choices.

A few days later, in a totally different context and with an entirely different person, the third incident occurred, when I was told an updated version of an old story to demonstrate the power of “a few good men” (and women). The story was as follows:

“50 people were travelling in a bus. Part-way through the journey, the weather suddenly turned stormy, with massive thunder and lightning bolts cracking all over the place. At times it seemed as if lightning would strike the bus and kill everyone on board. Then, someone proclaimed that there was someone on the bus whose end had come, who the lightning was seeking, and that it would be better for everyone else to get that person off the bus. The driver stopped the bus, and each person was sent off by turn, to go and touch a tree at a distance. 49 people got off the bus and returned unharmed after touching the tree. Then, as the last person got off and walked away from the bus, the bus was struck by a massive bolt of lightning.”

I thought this was a gruesome but effective moral science tale! During the next few hours I went about my activities, but kept mulling over the lesson(s) in that little story.

Then, that very afternoon, I got an email containing the following thought: “…when it looks like the whole place is going to implode – with pollution, disease, and war; famine, fatigue, and fright – there are still those who see the beauty. Who act with kindness. And who live with hope and gratitude. Actually, they carry the entire planet. (Mike Dooley)”

In looking back to the article 18-months ago, I closed the loop: it is the individual manager, who is also a citizen in a community, a consumer, and as a parent a stakeholder in future generations, who has to make the choices. His or her choices – both right and wrong – do have an impact beyond his or her own life and business. The so-called triple bottom line – profit, people (community) and planet (environment) – are irrelevant unless the first question is answered: “what does this mean for me?”

So as we go about our day, launching and growing brands, opening new stores, creating new products, I offer you this thought to reflect upon: are we carrying, or being carried? Is the bus safe because of us, or are we the ones the lightning is seeking?

[Go to the earlier post: “Corporate Responsibility – Beyond Babel“, December 2008]

REVIEW: BEATING THE COMMODITY TRAP: Richard D’Aveni (Harvard Business Press)

In his latest book, Professor Richard A. D’Aveni focusses on a topic that most businesses should be acutely concerned with: the problem of commoditization. In interviews he has accurately described commoditization as “the black plague on modern corporations” and “a deadly disease that’s spreading like crazy”.

Certainly, if one had to pick the ultimate nightmares to keep CEOs awake at night, commoditization would definitely be among the top of the list. Specifically, given the economic uncertainties around the world in the last couple of years, business leaders who are not concerned about their products or services being turned into commodities are either supremely equipped to maintain their differentiation, or immensely deluded as to their capabilities to fight market forces. Prof. D’Aveni suggests that maintaining differentiation alone is not enough to sustain business.

A product or service becomes a commodity when it is not distinguishable from competing offerings and therefore not valued above the competition. Prof. D’Aveni views commoditization along two key attributes: the benefits or features that are being offered and the price (margin) that is available to the business. Based on his model, he has identified three types of competitive stress that a business could face:

• Deterioration: In a deteriorating market, competitors present low-cost and low-benefit offerings that appeal to the mass market. This is possibly commoditization in its “purest” sense, where the customer ends up valuing the lowest price over and above any other benefit or feature. In this scenario a business can either get stuck in the commodity trap, fighting an ever downward spiral of price and cost minimisation, or could marginalize itself to a niche where it can protect its margins.
• Proliferation:  According to Professor D’Aveni, a proliferating market constantly sees the emergence of new combinations of benefits and price that serve specific segments. This is not about the business offering turning into a true commodity, but extreme differentiation and proliferation of choice do make it difficult for businesses to create a clear value statement that can be priced above competition. Professor D’Aveni describes this as “being squeezed in the middle of a pack of piranhas” which are snapping away pieces of the market.
• Escalation: This form of commoditization is possibly the most prevalent in industries that are prone to disruptive changes (such as technology, consumer electronics and communications). Simply put, extreme competition here results in more for less, as each competitor goes one-up in terms of offering more benefits for the same price, the same benefits for a lower price, or at its most extreme, higher benefits for a lower price. Prof. D’Aveni suggests that companies try and control this downward momentum.

The book suggests competitive strategies that a business could take to avoid getting caught in the commodity trap.  These strategies can be boiled down to the biological choice: fight or flight (escape). Professor D’Aveni echoes the basic warfare strategy laid out by many military and business strategists through the ages. He suggests that businesses need to gauge the opponents, choose their battles, and pick opponents against whom they can win. He also calls for pre-emptive action: where companies can, they should either change the business environment to avoid commodity battles entirely, or initiate the battle of commoditization and control its direction and momentum.

In fact, anticipation and pre-emption is the key to avoiding the commodity trap. To help with this, Prof. D’Aveni offers a relatively simple framework to analyse a current market situation in terms of a price-benefit matrix, and to identify the advance corrective actions to be taken.

The book is short and straight-forward enough to pick through a domestic flight, or to read in the back-seat during a long commute between office and home. The easy to understand framework gets the messages across quickly. In analysing the variations of commoditization, both in consumer and business oriented industries, the Professor also offers up something for everyone.

However, the book’s strengths also turn out to be among its biggest weaknesses. The book would have benefited from more depth to each of the concepts. Skipping quickly from one area to the other, in some places the book risks losing coherence of thought.

Some short books are like downhill hairpin bends on a mountain road; Prof. D’Aveni’s book is one of those. Much as you might be tempted to go fast, it’s advisable to go slow. If you speed through it, you might miss a nugget that actually makes sense to your business.

One of the other grouses I had was with the examples quoted. The predominantly US market examples reduce the book’s relevance for a global audience – the Professor presumes the reader will know the company and its context well enough to understand the lessons being discussed. In some cases the examples are incomplete and possibly even incorrect: one such is the example of Zara. The broad-brush attributes Zara’s business success to turning fashion into commodity, and ignores the fact that fashionability and desirability are a cornerstone of Zara’s offer, not the cheapest price. Others would possibly be far more accurate examples of commoditization in the context of price.

However, if you are sufficiently concerned about the possibility of being commoditized out of profitability, or being marginalised out of market share, I would suggest that you could easily overlook these flaws. The fundamental premise of the book is far too important to ignore. [Beating the Commodity Trap on Amazon]

(This review was written for Businessworld.)

Last week, Starbucks unveiled its strategy for profitable global growth, having taken approximately US$ 600 million out of costs in since January 2008.

About 3 years ago in a leaked memo, chairman Howard Schultz had raised concern about how, in the race to scale and to become consistent, Starbucks was losing sight of all critical things that had made it successful in the first place. (“The Commoditization of the Starbucks Experience – Soul Searching by Howard Schultz“).

In January 2008, Schultz took on an active role as CEO in a bid to stem the rot (“Leadership Change at Starbucks – The Barista Returns“).

These two years have been eventful. Shortly after Schultz stepped in, Starbucks announced that it would close 600 under-performing stores in the US. That was well before the “financial tsunami”. In 2009, another 200 in the US and 100 globally were identified for closure, and the company also scaled back on its 2009 expansion plan for 200 new stores.

At its shareholders’ meeting last week, Starbucks presented a more confident face, and outlined a return to growth with plans to expand its presence and “accelerate profitable growth in both the U.S. retail business and in key international markets”. (This profitable growth mantra was also recited in last year’s shareholder meeting.)

However, while the business is looking better, it is far from fixed.

The environment is different. Globally, consumer wallets are leaner, competitors are meaner, and Starbucks may yet need to shrink further; the fat ain’t all in the latte.

Yet, there must be much good in the business if, for all its faults, it still gets imitated around the world.

According to Starbucks, it currently has less than 4 percent of the U.S. coffee market with its 6,800 own and 4,400 licensed stores, and less than 1 percent of the global coffee market even with 2,000+ company stores and 3,500 licensed stores. The company sees that as enough headroom to grow.

Schultz has promised to put the tough lessons learned in the last two years to good use. The company currently has approximately 200 fewer stores than it did at the beginning of 2009 even after new store openings during the year. (To put the current number of 16,700+ stores in perspective, the company had a total of “only” 2,600 stores in Q1-2000.)

But there’s something to think about. If the entrepreneur needs to step back in to fix things gone horribly corporate (bland) and wrong, maybe it’s time to acknowledge that there’s a logical limit to the size and scaling-up capability of personalized experience businesses.

Or, as a friend says, scale can be a logical outcome of excellence but excellence is never the logical outcome of scale.

It remains to be seen whether this round of growth will come from the company’s natural strengths or whether Starbucks will return to growth-by-steroids as Schultz eases on the controls.

For someone who loves books and dislikes naming favourites, it’s tough to quickly make a list of only 10 must-read books. There are so many valuable books an entrepreneur can learn from that this list is only a starting point, rather than “the Top-10”. But, then, one of the most important things an entrepreneur can do is to overcome his or her own resistance at some of the most inconvenient times. So here goes!

1. Good to Great (Jim Collins) – this book delves into some fundamental strengths that entrepreneurs need to seed into their business fairly early. Interestingly some of the companies listed in the book may no longer be called great (a weakness with most management books quoting specific examples), but I believe the principles stand the test of time.
2. The Tipping Point (Malcolm Gladwell) – some small things do become big. Every entrepreneur and start-up would love to know how and why; Gladwell’s book offers a different perspective – from epidemics to better governance. Much learning for the start-up and the small business owner.
3. Losing My Virginity & Screw It, Let’s Do It (Richard Branson) – one autobiography is usually enough for most people – trust Richard Branson to not fit into that mould. I’ll count them as one. As an entrepreneur who went from selling records to creating one of the most diverse brands covering airlines to telephone services, Branson will certainly have something for everyone. The books offer a view into his struggles as much as his successes.
4. The High Performance Entrepreneur: Golden Rules for Success in Today’s World (Subroto Bagchi) – if for nothing else, read it for the first chapter: “How Do I Know if I Am Ready”. Of course, once you’ve gone through that chapter, it is remarkably easy to go through the rest of the book, which offers guidance from Bagchi’s own deep experience as an entrepreneurial manager and as an entrepreneur.
5. Fortune at the Bottom of the Pyramid (C. K. Prahlad) – who says you have to have millions in the bank and service only rich customers to be a successful entrepreneur? I must admit I came very late to this book, and am yet to complete it, but it is an excellent reference source for case studies of innovative and very large businesses being grown in markets that are typically treated as poor or low value, environments that many Indian entrepreneurs can relate to.
6. Made to Stick: Why Some Ideas Survive and Others Die (Chip Heath, Dan Heath) – Inspired by the Tipping Point, the Heath brothers describe what it takes to get your ideas across, and make a lasting impact. A must for entrepreneurs looking for funding, to hire great people and keep them motivated, and to capture lasting customer relationships.
7. It Happened in India: The Story of Pantaloons, Big Bazaar, Central and the Great Indian Consumer (Kishore Biyani) – there are too few books about or by Indian entrepreneurs, so this is one growth story in desi style that many start-ups would be able to relate to. It is not as polished as most other entrepreneurial autobiographies, but valuable nevertheless.
8. The New Business Road Test: What Entrepreneurs And Executives Should Do Before Writing A Business Plan (John Mullins) – an someone who turned from corporate life to academics and further to being involved with entrepreneurs, Mullins provides a great framework to help the entrepreneur filter and refine his concept of the “next big thing” into a real business.
9. Venture Capital Funding: A Practical Guide to Raising Finance (Stephen Bloomfield) – while written from a UK and European perspective, it is a valuable reference for anyone looking for external funding. A practical guide to the whys and the wherefores, the jargon and the structures of venture funding written for an entrepreneur.
10. And last but not the least – pick your favourite philosopher or guide. No matter whether we are overtly spiritual or completely agnostic, there are times, many times in an entrepreneur’s life, when we need to step beyond the intellectual construct of business, look beyond plans and strategies, and next year’s targets. Depending on how you are feeling and what you need at that particular time, this book (or these books) can be versatile in offering you guidance for your next steps, direction to correct your course, or simply a platform to stabilise yourself.

The thing about lists is that even if you find one item on the list that makes a substantial difference to you, the list has been useful. Among the above, I believe you will find more than one that will create such an impact. Happy reading!

[Column written for The Economic Times, 13 November 2009]