Starbuckscoin

The metal Starbucks gift cards are in limited supplya little bit by design and a little by accident, much like Bitcoin.

Maybe they should check out how many of those things were bought in Cyprus.

The “cheaper to keep a client than get a new one” myth

I’ve heard this repeated dozens of times to focus an organization on client retention.   The trouble is, it isn’t always true and if an organization focuses too much on client retention when it isn’t true, it can hurt.

Most organizations would love to have 100% client retention, except maybe non-profits whose goal is providing temporary help.

In the real world, no organizations have 100% client retention.  Even the best lose clients. Sometimes clients die, move or change what they value or just discover they want something different.

Good organizations will have client retention in the 70% – 85% range.  Organizations with less than 65% to 70% retention might have the opportunity improve retention, depending on the nature of the business.

But, at some point above 70% retention (and this varies depending on the type of organization and service, etc.) you reach a retention rate where you run into the law of diminishing returns.  To increase the retention by another 1%-point, for example, is costlier than bringing in new clients who value what you offer.

Let me illustrate with an example.

I use to use a small plumber for my home plumbing needs.  He was good and reasonable and good enough, in fact, that sometimes I had to wait a few days for him to come out. Once this proved to be a problem, because I had a leak that couldn’t wait a few days to fix.

I called another company and found they also did good work and I didn’t have to wait a few days.  They could have someone out within two hours.  That convenience advantage, along with their good work and reasonable prices, was enough to get me to switch.

However, my previous plumber still has plenty of work.  Losing me didn’t cost him much business.

For him to change his business to satisfy folks like me would cost him a lot.  He’d need to hire enough plumbers to cover the demand 24/7 and invest in more trucks and equipment. He’d need to hire schedulers and manage a larger workforce.

But, he’s happy with the business and profits he earns from his set of loyal clients, who don’t place as much value on how quickly the plumber arrives.  Perhaps his customers are builders and commercial accounts who can schedule work in advance, or simply people who can get by for a few days with a leak.

Even in a market that appears as homogeneous to outside observers as plumbing, there are some key things that differentiate the value proposition of what different plumbing companies offer and it is difficult for any one company to satisfy all these value differences.

For my previous plumber, it is cheaper to let me go to the competitor that offers what I value while spending his resources on finding another client who values what he offers.

That holds true until you reach a point where fewer and fewer customer value what you have to offer.  At that point, the market (i.e. customers) is sending you a signal that you need to change what you offer, or go out of business.

Admittedly, there’s a fine line and art between knowing when you need to just focus on finding clients that value what you offer and when you need to change.

Based on these thoughts I have a few recommendations for businesses.

First, don’t always assume that increasing retention is cheaper than finding new clients. It’s actually not very difficult to estimate the costs of each for any business.  Try it and see if you can compare the acquisition and incremental retention cost per client.

Second, if your retention is stable within a few percentage points, plus or minus, then that’s likely a sign that it’s just as effective to keep focus on both finding new clients and retention.  You should not favor one over the other.  You need both.

Third, be prepared for when retention does start to plummet.  Consumer preferences do change in unpredictable ways.  One way to prepare your organization for such changes is to run small experiments with various business model approaches and see which ones resonate. Also, keep and eye on what your competitors are doing differently and understand why that may or may not work for you.

I’ve seen too many organizations who only focus on their bread-and-butter value proposition and get caught by surprise when consumer preferences change.  That puts them in a dangerous position of throwing hail mary’s when preferences change rapidly. The chances of hail mary’s succeeding are less than the chances of small, unforced experiments.

I’ve also seen organizations who move too rapidly to change their business model even when it’s doing fine.  In the process, they often fundamentally lower the value proposition for existing clients.  New Coke is a good example.

Starbucks irked some of its faithful recently be introducing a light roast.  But, they didn’t repeat the mistake of New Coke, by replacing dark roast with light roast, they just added the new light roast to the existing product line.  Starbucks’ faithful will get over it, because they can still get the products they love and now more of their friends (the 40% of coffee drinkers who prefer lighter roasts) will come with them.

Fourth, develop a deep understanding of the value proposition your organization offers. Why do customers use your product or service?  Ask them and ask them again.  Don’t take their first answer as the real answer. There is probably four to ten reasons why they use you. Also, don’t just look for the answers you think are right. Some of the worst business strategy blunders come from folks who impose their own incorrect view of the value proposition on the organization.

Third Place + Wine

When I first heard a while back that Starbucks was testing serving wine in its stores, I didn’t think much of it.

When I read today that they were expanding this test, the value proposition suddenly occurred to me.

Before, I was  stuck on Starbucks as a coffee company.  But, they also have another business — providing comfortable space for folks to sit and chat, read or surf the net.  They call it the third place.  It’s not your home or business, but it’s close.

I suddenly thought about the times when I’ve been out with friends, family or business associates and we wanted to catch up over a glass of wine or beer, but we didn’t want a noisy, or empty, bar.  And we didn’t really want to sit at restaurant where everybody else is eating.  We struggled to find a place to go.  Often we settled for picking up some bottles of wine at a grocery store and heading home or going to bar.  Neither was ideal.

Sipping some wine at Starbucks would be the perfect place for that.

I also thought about the times when I’m on the road — be it for business or vacation.  It would be nice to have a low-key place to grab night-cap, catch up on emails (and blogs) and do some mild people watching.

I can see how this fills a nice niche for consumers.  I hope their tests work.

Two ways of saying the same thing

Normally, the holidays bring some family discussion on politics.  This weekend, those discussions were limited.  The following is the extent of the political discussion I had this weekend:

Family member:  Have you heard about what Howard Schulz [Starbucks founder] is doing about politics?

Me:  A little.  I don’t know much, but to me, it sounds like Schulz is saying “we just need to all get along and do the stuff the I (or my side) wants to do.”

Family member:  No, that’s not it at all.  He, and others like Ariana Huffington, want to end the gridlock in government so that government can get some things done.

Me:  Do you realize you said exactly what I said, just differently?  When people say they want to end the gridlock, they mean they want to do the stuff that they think should be done, but not what the other side wants to do.

Family member:  I don’t think that’s true.  I want to do the stuff that my side wants to do and the stuff that your side wants to do.

Me:  Really?  Name one thing that my side wants to do that you support?

Family member:  Well, I can’t right now.

Me:  Then what you said is just a platitude.  It sounds good, but means nothing.  It’s tough to do what one side wants to do — which ends up growing government — and what the other side wants to  do — shrinking government — at the same time.  That’s why there’s gridlock.

Me again (summoning Walter Williams): Here’s the thing.  We need to get more of our decisions out of politics.  You and I don’t have to fight over which jeans we should wear because we each get to make the choice that’s right for us.  I don’t get to force you to wear the jeans that I like.  But, if ‘we’ said as society that we all have to wear jeans, we’d fight over which jeans to wear and some group of people would end up forcing their preferences on everyone else.

I think Schulz has a brilliant business mind.  I encouraged my family member to read his book Pour Your Heart Into It.  It holds a lot of good lessons for starting, growing and running a business.

I also encouraged my family member to look into what other business leaders have to say about politics, like John Mackey, CEO of Whole Food Markets.

Will donations create jobs?

I picked up the brochure on Starbucks new job creation donation project.

The brochure explains that donations will be used to give grants to community development organizations that loan money to community oriented businesses.  For a $5 donation, a community development organization can lend $35 to a business.  And you get a bracelet that says “Indivisible”.

Hmmmm…

The project sounds great.

It took me a little bit to figure out the logical flaw.

But, it occurred to me that this is a version of the Broken Window Fallacy.

It took me a little bit to recognize it since there is no destruction (breaking of windows) here.  But the Broken Window Fallacy isn’t about breaking windows.  The fallacy lies in not considering what would have happened anyway.

What would have happened if I spent the $5 on something else, like more coffee beans? How many jobs would have been created from that?

Probably about the same, or more, as what’s created from the $5 donation.

Starbucks’ efforts isn’t really about creating jobs.  Starbucks’ efforts are about creating seen jobs so it can tell you stories about them to make you feel like you are doing something good.  Their efforts ignore that you are doing just as good by spending or otherwise investing that $5, but the problem is that good is unseen and harder to tell a story about.

So, technically, yes, donations will create jobs.  It’s just not clear if they create any more jobs than if the money been used for something else.

Coffee Value Proposition

Within two blocks of my workplace are 10 places to buy a cup of coffee.  Starbucks, one block away usually wins the battle of value proposition.  As one of my coffee buddies and I walked there one days, we nailed the key piece of value proposition that keeps us coming back to Starbucks – consistency.    Other places have good cups of coffee and good service, but not all the time.  We take less chance with Starbucks.

Part of that consistency can be attributed to their operations – hiring, training, delivery, brewing, roasting, etc.  They consistently deliver a good cup of coffee and friendly service.

Another part of that consistency has to do with their success.  They pour a lot of coffee, so we know that there’s a much better chance that the coffee is fresh and tasty.

Today, however, we opted for a closer cup of coffee.  With temperatures outside near the single digits, we decided that not having to leave the building was good enough value proposition.

Value proposition is a fickle and ever changing thing.

Very Clever Starbucks

I bought two bags of Starbucks Pikes Place ground coffee at Target.  

There was an instant $3.00 off coupon with the purchase of two bags.  I also noticed that I could get a free cup of coffee at Starbucks.  Great coffee, low price.  No brainer.  I bought it.

I just read the details for getting my free cup.  I just bring in the empty bag.  Genius.  Now they’re rewarding me for finishing the bag.  That’s good.  They’ve solved a problem for me.  Before, the bag of coffee beans was precious and I tended to conserve.  Now they’re rewarding me for finishing it up.  Now I have less resistance to using it up. 

I’m not a fan of gimmicky pricing and discouting schemes, but I’m a fan of this one.  The $3.00 coupon got me to buy an extra bag at the store, which gives me more coffee at home.  The reward of a free cup of coffee at Starbucks with an empty bag solves the problem of wanting to hoard the coffee.