New JetBlue Terminal at JFK

Yesterday, while talking about STP and the importance of making sure your marketing mix supports your positioning, I talked about JetBlue's new terminal at John F Kennedy (JFK) Airport in New York. 

Here is a link to the 3-minute Ad Age video podcast on iTunes regarding the terminal and why JetBlue built it. 

Adam Smith was Right

As often happens, economic turmoil begets questions of whether free market thinkers were right or wrong – and whether regulation needs to be increased to preserve the country’s economic integrity. Now, even greater questions need to be asked: should the government be bailing out companies that make bad bets, and if so, who ultimately pays for these bailouts? These questions are ironic, particularly from avowed free marketers, because Adam Smith himself warned about the challenges of capitalism in his conclusion of the mercantile system in 1776:

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. The maxim is perfectly self-evident, that it would be absurd to attempt to prove it. But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.

Today, we find ourselves precisely where Adam Smith said we would be.

The irony of US Taxpayers bailing out banks is that the bailout follows years of the banks insisting – and getting – less banking regulation. This gave banks the ability to branch into other businesses and freedom from oversight of financial derivatives so complex that most bankers don’t even understand what they’re buying and selling. It’s truly appalling that the U.S. Government is bailing out bankers who made outrageous bets and, now get to keep “earning” their six and seven-figure incomes while their banks are in bankruptcy. And what do consumers get? They get to pay for incompetence of these avowed “free marketers” through taxes.

The banks also asked for – and got – a new bankruptcy law that makes it much harder for consumers to discharge debt. This makes it much more lucrative and less risky for banks to extend even more credit to the American consumer. The avowed “free marketers” claimed that the new law benefitted consumers who couldn’t get loans before – and therefore caveat emptor, let the buyer beware – and somehow this was a great way to let individual consumers decide what is best for them. But that is a very naïve view of how marketing and banking work. While not perfect, banks are far better at predicting which consumers are likely to default on a loan or credit card than the individual consumers themselves. Banks have the advantage of being able to model consumer behavior using enormous databases of past consumer behaviors to understand how similar consumers will act in the future. A first-time homebuyer has no experience paying a mortgage, property taxes and upkeep for a home.  So the bank has an overwhelming information advantage over the consumer, yet the new bankruptcy laws put the burden on the consumer. And what happens when the late charges and higher interest rates force homeowners to give up their homes, their down payments and their dreams? The banks take the homes and the US Government bails out the banks. And consumers get to pay again because the avowed “free marketers” got the bankruptcy law they insisted would help the consumers – but didn’t.

Trying to feed alongside the bankers at the trough of public money last week were American automobile companies. The group is led by G. Richard Wagoner, the CEO of General Motors. Mr. Wagoner is the same man who orchestrated his company’s purchase of Hummer in 2000 because he was confident GM had tremendous opportunities to “grow the brand” of a truck that yielded seven miles to the gallon. The same man who has been arguing against raising the US fuel economy standards and fervently fighting the reclassification of light trucks since at least 2001. The same man who, in 2002 when Toyota was experiencing tremendous success with the Prius, stated, “I don't think anybody's got confidence that the economics make any sense,” and then gave us the Hummer H2 – which gets eleven miles to the gallon. Now Mr. Wagoner and executives from Ford and Chrysler are pleading for subsidized loans to make more economical vehicles.

Of course the ultimate irony of all this is that the big three have been making gobs of money selling Americans gas guzzling SUVs over the past decade while their Japanese and European competitors focused on making great cars that are much more fuel efficient. Now the big three want the US taxpayer to subsidize building more fuel efficient cars so they can compete with their Japanese and European competitors – and make money by selling Americans more fuel-efficient cars to replace the SUVs they so happily sold them. So Mr. Wagoner pulls in millions a year over the past decade based on his leadership of (1) buying the Hummer brand, (2) lobbying Congress not to raise gas standards because that would make GM uncompetitive, (3) selling Americans gas guzzling vehicles, then (4) realizing that GM needs to sell Hummer because no consumer would buy a Hummer with gasoline at $4 a gallon, and (5) lobbying Congress for more handouts, because somehow items 1-4 were not his fault. And what do the American consumers get? Gas guzzling vehicles, more polluted air, greater dependence on foreign oil and, ultimately, stuck with the bill for Mr. Wagoner and his avowed “free market” cronies’ highly paid “leadership.”

Adam Smith was right. True capitalism benefits the consumer. But too often, the needs of America’s consumers are almost constantly sacrificed to the needs of America’s producers. 

Social Responsibility & Ethics: Student Loans and Google

Well, having just finished up our sessions on Social Responsibility and Ethics in Basic Marketing, I was surprised to see two of the topics covered show in the New York Times in the following days. 

Code of Conduct for Student Loan Companies

First, eight student loan companies - seven of them were being investigated by the New York Attorney General, Andrew Cuomo for misleading students about the obligations and attractiveness of various student loans - agreed to a new "code of conduct" and put up $1.4 Million to fund efforts to educate students and their parents about the risks and responsibilities inherent in taking out student loans. [You can see the NYT's article here.]  

If you go the Attorney General Cuomo's web site, you can see the kinds of things that are now prohibited under the code of conduct, which include: 

using logos and return addresses that made it look like the lender's solicitation to consumers was from the federal government or the student's current lender;

mailing fake checks or false rebates offers on current loans to entice students to take out loans;

giving inducements to students, such as gift cards, iPods, and GPS devices, to distract students from focusing on the (sometimes onerous) terms of the higher education loans being promoted;

offering inducements to students to convince their friends to take out loans with particular lenders;

making false and misleading representations as to the advantages of private student loans over lower-cost federal loans;

providing illustrations of loan costs or terms that are available only to a tiny fraction of borrowers without disclosing that fact;

failing to guarantee that advertised borrower benefits, such as discounts on the interest rate of the loan during the repayment phase of the loan, follow with the loan, regardless of who purchases the loan in the future.

What's kind of amazing is how these seem like very straightforward - and commonsense  - ethical obligations. But sometimes, when companies get into the thick of things in trying to compete with others, they can lose perspective of what's ethical and what's not. Also - as is clear from the code, which is based on questionable practices that already existed in the industry - is that what's best for the customer clear gets lost!!  Hence, to the point made in class, having an explicit code of ethics is so critical for so many companies. If everyone knows what's "OK" and "what's not," then it's a lot more likely that everyone will act appropriately and not start down the slippery slope of doing things that, in hindsight, clearly look wrong. 

Also, to the point of our conversations, it's interesting that it took the threat of legal action by the New York Attorney General to make this happen. So again, the role of government and the law have a role to play in making consumers better off. 

Is Google behaving monopolistically? 

Another article was fascinating because it deals with whether Google is acting in a monopolistic fashion in dealing with its customers (who buy advertisements from Google) and its channels (who sell advertising space using Google). 

One source estimated that Google controls nearly 70% of the on-line advertising market through its various programs that sell and buy space on Google web searches and a plethora of other web sites. OK, by classic Industrial Organization Economic's standards, that's sounding pretty monopolistic. 

Of course, the "Chicago School" would argue that just because Google does a better job than any other service of matching buyers and sellers of advertising doesn't make them "bad." 

I fall somewhere in between - in kind of an "it depends" area. I agree that being successful and, therefore, controlling 70% of the market doesn't mean that a company is "bad." The key underlying concern of the antitrust laws is that a company doesn't act in monopolistic - and, therefore, anti-competitive - ways to prevent competition. (Just to be clear, that's where I think the Chicago School economists were way off base regarding Microsoft, which did use its market power to prevent competition and, therefore, maintain a monopoly in operating systems and create a new one in web browsers.) 

Anyway, back to the article, I think the case against Google is without merit - at least as portrayed in the New York Times article. The key to the article was a case study of Mr. Savage, who built a business model based on the following: 

Mr. Savage estimates that he was paid around 10 cents every time someone clicked an ad on his site. The difference between that and what he paid Google to advertise against search terms — usually around 5 or 6 cents —was his profit.

The article goes on to state that Mr. Savage's business model was pretty much destroyed when Google changed how it bought and sold ads. 

But it doesn't appear to me that Mr. Savage has much of a case. His entire "business model" was based on arbitrage opportunities - the difference between what Google could be selling ads for and what it was selling ads for. If Mr. Savage's "service" actually had value beyond arbitrage  - he runs Sourcetool.com, which is a directory of business-to-business companies - he'd be able to charge: (1) companies who wanted to be listed on his service and/or (2) people who wanted to access his directory. But since he made his service free and then made his money by buying Google ads cheap and selling ads back for twice as much, it appears that the market cleared a bit and Google finally figured out a way to leave less money on the table for arbitrators. 

Well, regardless of what I think, if you read the article you'll get a pretty good sense of why policing anti-competitive behaviors can be difficult. It also highlights the challenge of when people use anti-trust laws to challenge a company, even when there is no merit to the case - whether that's the situation with Sourcetool.com or not. If people cry "monopoly" too often, I think the courts and justice department become overwhelmed and have less to time spend on actual violations of anti-trust laws. 

If you don't vote, you're a moron.

Great monologue from Craig Ferguson on 10Sep08!!! You need to watch the whole thing. It's a great commentary on the media, politicians and Americans. The bottom line, "If you don't vote, you're a moron!!" (It'd be great if all Americans were as passionate about voting as Craig, who's been a U.S. citizen for less than a year!) 

If you don't have new customers, how can you have loyal customers?

OK, executives in the airline industry have officially lost their minds. On Friday, 05Sep08, Continental Airlines decided to start charging $15 for the first bag checked - much like American Airlines and the other airlines that followed. Interestingly, the NYT article about this stated a caveat regarding the fee: 

Continental, based in Houston, said the fee would not apply to elite members of its frequent-flier program, those in first- or business-class seats, customers traveling on full-fare economy tickets, or military personnel and their families traveling on official orders.

Now, two fascinating things about this development. First - as mentioned in an earlier post and updated regarding Southwest Airlines' response in a later post - is the extra fee really worth the aggravation? It certainly can't be good for the brand or customer satisfaction. 

In fact, I looked up the airline satisfaction ratings on the American Consumer Satisfaction Index (ACSI) website and - big surprise - Southwest is the highest rated airline and American, Continental, Delta, Northwest, United and US Airways all are rated below average in customer satisfaction. And those ratings were collected before American instituted their baggage fee!! (Note, ACSI is the satisfaction model I discussed in class.) 

Just to make sure it wasn't purely an ACSI data abnormality or something, I took a gander and J.D. Powers's website and found their most recent Airline satisfaction numbers. At first, I was surprised that Southwest wasn't even mentioned in the press release. Instead, it stated "Alaska Airlines, Continental Airlines and JetBlue Airways Rank Highest in Customer Satisfaction." What's going on here? 

Well, it turns out that JD Powers separates "Traditional Airlines" from "Low Cost Airlines." (I guess calling the "traditional airlines" "full service airlines" would be too much of an oxymoron.) Anyway, although they're separated, both categories use a 1,000 point scale. So, combining the charts from JD Powers, here's what they would look like:

1. JetBlue Airways - 776 points (JetBlue is not rated by ACSI)
2. Southwest Airlines - 728
3. Frontier Airlines - 715 (not rated by ACSI)
4. Airtran Airways - 708 (not rated by ACSI) 
5. Alaska Airlines - 684 (not rated by ACSI)
6. Continental - 684
7. Delta - 669
8. Air Canada - 654 (not rated by ACSI)
9. American Airlines - 644
10. US Airways - 640
11. Northwest - 628
12. United - 628

Also, note that beginning with #5, Alaska Airlines, all of the "traditional airlines" are rated at number 5 or lower in customer satisfaction!!

So, the way that the airline executives think they can increase customer satisfaction - and therefore long-term shareholder value - is to aggravate customers even more than they have already, while the "low cost" airlines eat their lunch. Hmmm...."How's that working out for you?" 

OK - time for the second point, and the title of this posting: If American Airlines, Continental and the others waive baggage fees for their loyal customers (e.g., elite frequent fliers), but charge new/infrequent customers to check bags - how in the world will they ever get any new customers to be loyal? This makes no sense!! The only non-elite people who would fly them regardless of the baggage fees would not have a choice (e.g., Continental has a near monopoly on Cleveland, OH). Of course, if people don't have a choice, why give them incentives to fly you anyway?  In fact, getting back to the example of Cleveland - once Southwest added Tampa-to-Cleveland connection, I stopped flying Continental and refuse to fly them again if I have a choice. 

Hence, by only charging the "non-loyal" customers for baggage fees, you'll never increase the loyal customer segment of customers. I'm not sure they'll be able to replace the loyal customers they're losing!! If I believed in conspiracy theories, I'd be inclined to think that it's Southwest and JetBlue - currently the highest rated airlines in terms of satisfaction - that somehow got American, Continental and the others to institute these fees!  (OK, I'm not a conspiracy theorist, but how someone could possibly think that by offering crappier service and charging more will attract more customers is beyond my comprehension.) 

The bottom line: before focusing on your "best customers" to the detriment of your other customers, it's always a good idea to make sure of two things. First, are you really making more money on those customers - or are you giving all the margins away by trying to keep them happy? Second, make sure you've got a way to get new "best customers." Otherwise, your "best customers" will keep declining until you have no more - and then it's too late! 

I can't wait to see the next batch of airline industry customer satisfaction numbers that include the baggage fees;-) 

Knowing your target market & decision-maker

Over the past two weeks, we've been going over STP (segment-target-position) as part of the overview for Basic Marketing. Related to knowing your target market - and just as importantly - the decision-maker (which is not the same thing), there was a clever post on the New York Times "For the Moment Blog" last week regarding ads for men's underwear. The guest blogger (Grant Thatcher) made the observation, regarding pictures of good-looking men in underwear ads in Milan: 

Do Milanese men have a preternatural desire to look at muscular, seminaked men? Well, of course in some cases, yes, but the canny luxury labels are well aware that the men’s knit underwear industry is worth a staggering $1.1 billion — and even more interestingly, the majority of these briefs are actually bought for men by women. Ding! Now you wonder what’s with all the muscle dudes. … Go figure.

Very funny! And, to the point, although men are the target market for men's underwear - it's either women (or gay men) who are typically making the purchase decision. (OK, to be clear, I mean "or gay men buying underwear for themselves," I think.) So they're the ones you need to target with promotions if you're selling men's underwear. And, apparently, it's also somewhat aspirational for most purchasers, since they think their beau will look as hot in the underwear as David Beckham, etc. 

And lest any guys think this is a bad example, let's just try putting the underwear on the other....well, you know what I mean..... Who do you think spends more time looking at Victoria's Secret catalogs - men or women? How many men buy have bought "items" from Victoria's Secret for their wives/girlfriends as a "gift." (A gift for whom, is all I can think.) 

And of course, taking it all away from sex (or, more precisely, talking about the consequences of all that undergarment inspired sex), even though little kids are the target market for all-things-Sponge Bob, it's Mom or Dad who's the decision maker and ultimate purchaser. 

Anyway, the bottom line is: know your target market - and who the decision maker is. And you should never pick a target market without knowing who the decision maker is, otherwise, you might not have a much of a market at all. 

And with that, I've just got to post this video from AussieBum. It's the same video Grant posted on his NYT's blog. The music is "Would you...?"  from Touch and Go and is downloadable from iTunes. (Yea, I really like the song....):