The Purpose of a Business is to Create and Keep a Customer

“The purpose of a business is to create and keep a customer.” - Peter Drucker

No matter how many times we say it, we forget it. We get caught up in operations, or competition, or marketshare, or share price. Yet a business, like a life, has a purpose: to create and keep a customer. I might add, “to keep that customer profitably satisfied.”

Earlier this month, a very well known Apple developer, one of the “super fanboys” (yes, there really is such a term), Marco Arment, wrote an article decrying Apple’s loss of the high ground – both functional and moral – in its products. While Marco did try to backtrack a bit, due to the firestorm his piece generated, the train had already left the station. This was not due to hatred in the anti-Apple camp, but rather because Marco’s plea touched a nerve among many longtime Apple customers and developers, including this author.

The number of follow-ups is far too great to mention, but here are three that are particularly salient, because they are focused more on fixing and less on complaining.

  • Glenn Fleishman published a detailed list on his blog (called a “glog”, as in “Glenn log”, as opposed to “blog”, short for “Web log”; brilliant) of the major things that are broken in iOS and OS X that Apple needs to fix ASAP.
  • Kirk McElhearn released a plea on Macworld for fixing iTunes syncing. Actually, what he really is asking for is better iTunes and better syncing, independently and/or together. Syncing is a such a crucial part of how we use our smartphones as media devices that making it painful or non-functional cuts to the heart of the usability experience. If you cannot sync, not only does it not longer “just work”, it does not work at all. I raised the exact same issue in my own article on making it “just work,” including that other, simpler models, like VLC’s, while less fancy, seem far more reliable.
  • Joe Dunn at Cloudbreak went straight for the culture that enables such shoddy work. This is especially surprising but necessary at a company that, for most of its history, had its employees living in fear of presenting products that were not elegant or beautiful enough, lest Jobs tear into them. Releasing something that actually didn’t work would have been absolutely terrifying.

Each of these three people takes a different approach.

Glenn Fleishman provides a practical, product-manager-driven approach. Implicit in Glenn’s article may be an accusation that Apple’s product management has fallen down on the job. Apple’s own product managers should have created and maintained this list, based on their own experiences and interacting with customers. Indeed, detailing and prioritizing what needs to be released when and why it matters is the number one job for product management.

Kirk McElhearn focuses on the Achilles heel, the weakness that can bring down an edifice. “If I cannot sync my music, movies and documents, what’s the point?” Losing sight of the basic requirements in favour of fancy features can only happen if you lose sight of your customers or, more precisely, lose empathy with your customers.

Finally, Joe Dunn analyzes how a company can fall into the very trap of losing sight of and empathy with its customers, and how to fix it. This is precisely in line with my recent discussion about airlines leaving customers in the lurch and employees with no way or incentive to help them. Joe lists several points, all of which are important, but they all boil down to this: always be your customer.

I don’t mean, “always use your own products” (in tech industry language, originally used at IBM, “eat your own lunch”), although that is necessary. Rather, more broadly, always live, breathe, eat, empathize with your customers. When they feel pain, feel their pain (not politically, like Clinton, but like a parent with a child); when they feel joy, celebrate their joy; when they wish something would get better, make it your mission to make it better as if it were your own wish, because it is.

This is how you create and keep customers.

How do you keep them profitably? That is all about the operations side of the business, the  equal partner of the product and market side, as we discussed before.

Business Life Lessons

  1. Always know exactly who your customers are, and why they want your products.
  2. Continually live, breathe, eat and empathize with those customers until they are as close to your heart as your family.
  3. Consistently operate with that empathy… profitably. Why? So that you can continue to serve them better.

If you have the slightest doubt that you know them, are empathizing with them, or are delivering profitably to them and for the right reason, get someone to help. Ask us.

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Scenes from a BBQ Restaurant

Years ago, a young man, let’s call him D, with whom I had once gone to summer camp followed his dream and opened a meat restaurant. They had great big burgers, flaming wings, fresh onion rings and fries, a meat-lovers dream. Not only did I enjoy going there, but when a group of friends helped me move apartments before I got married, I took them there for a “thank-you” dinner. Everyone felt it was a great trade!

Over time, as the business grew, investors made D a great offer for his restaurant. With its strong reputation and high customer loyalty, it had reliable revenues. In other words, its product, or revenue-side, was excellent. A little bit better management on the operations, or cost-side, could improve cash flow significantly. So they bought him out, and proceeded to improve the operations… along with cutting costs everywhere else.

Soon enough, the service level dropped. Portions shrank in size. The taste began to drop as the quality of the ingredients dropped ever so slightly. For some period of time, the lower costs for the same price meant higher profits. As their reputation caught up to them, though, revenues plummeted. At this point, the original  flagship location is no more, and of the many other locations, only a few remain.

At first glance, the failure is obvious: short-sighted profit focus starved the goose that laid the golden eggs.

At a deeper level, though, why did smart investors fail so miserably?

The Two Faces of Business

Running a successful business has many parts, but, at heart, it involves looking in two different directions at once: market and operations.

To be successful, you need to:

  1. Provide the right product or service…
  2. … to the right customers…
  3. … at the level expected by the customer…
  4. … at a cost acceptable to the business.

The first two elements – knowing what service or product to provide, to whom, at what price, in what package – are all about the product and market.

The last two elements – delivering the right service level and quality, in a timely manner, with customer service, while making a solid long-term profit – are all about operations.

The balance between the two creates a successful long-term business:

Market + Operations = Profit

The seductive nature of these, however, is that it is very easy to slip on one in the short term and inflate profits, seemingly satisfying the Board and investors. Like all seductions, however, the piper must be paid, and sooner than you expect. For example, you can deliver a cheaper, i.e. shoddier, product for some period of time, reducing costs for the same revenue and thus “goosing” profits. Eventually, though, customers realize the quality has slipped and shy away from your product, dropping your revenues and therefore the amount of margin you have to cover fixed costs. Conversely, they might accept the lower quality product as a new “cheaper” version, but demand it at a cost that matches its quality. Employees, as well, notice the “corner-cutting” and treat the customer and management in the same fashion.

If your business is not performing as you expect – insufficient growth, high customer churn, low profits, unhappy employees – somewhere you have a mismatch between the product customers expect and the operations to deliver it.

But it isn’t your fault.

Every executive or business owner comes from a specific background, either on the “revenue” (product) side or the “cost” (operations) side. It is hard to see the cost delivery mismatch if you are an Uber Sales person. The smart ones recognize that bias and strengthen their other side by bringing in people with experience on both sides of the fence to help them.

Is your business in balance? Contact us to learn how to “bridge the gap”.

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Ask Why You Care About Security

Recently, I had a conversation with a senior executive at a company about the firm’s information security. The conversation, like others I have had, revolved around a sudden increase in interest in that security.

To be clear, we are not talking privacy settings on Facebook (use them) or whether or not Snapchat pictures and messages really disappear (they don’t). These people are seriously concerned about loss of data due either to security breach by bad actors targeting the company, or simple loss of data due to employee errors. How really safe is the business information stored on servers, cloud providers and employee laptops?

People see the Target breach, the US Central Command Twitter account hack, the JPMC breach, the Sony breach, an unending list, and wonder, “am I next?” To their credit, even smaller providers, ones without all of the financial and payment information (Target, JPMC), national security implications (US Central Command) or brand name impact (Sony, Target), are recognizing that they are targets and are at risk.

While I always commend executives for taking information security seriously, it is important to understand why the company has a renewed focus on security, so we can understand:

  • What are we concerned about?
  • How urgent is it?
  • Who should lead and own it inside the company, and who needs to participate?
  • How much should we invest?

There are two broad categories of reasons why someone would care about their information security: internal and external.

Internal

Internal motivators are those that cause you to look at your information security for internal business reasons:

  • You want to reduce the probability of loss or exposure of information or services;
  • You want to mitigate the impact in case of such loss or exposure.

While these can be driven by the business side, the CIO/CTO/CISO (if you have one) will be the primary owner of this kind of information security review, as well as the follow-on policies leading to process and technology implementation.

While any information security policy requires head of technology participation, it can be very difficult to get anywhere without his or her active participation and sponsorship when the motivators are internal.

The benefits of internal motivators are two-fold. First, no certification is required, keeping costs lower. If you care about protecting your data for your own reasons, you do not need any kind of outside body to certify you. Nevertheless, it may be helpful to have that certification to keep you on the “straight and narrow” year after year, when temptations to slip and underinvest grow. Second, internal security motivators, like intrinsic psychology motivators, tend to lead to greater desire by employees to participate with changes. After all, we came up with this ourselves and we are doing it!

External

External motivators are those that impel you to review your information security because of market impact. This comes from one of two areas:

  • You have customers who insist on reviewing your policies and procedures, or even seeing certain certifications;
  • You need certifications for market value; it is easier to sell with these in hand.

Good examples include PCI and HIPAA. If you want to handle credit card transactions but do not have PCI compliance, do not expect any serious customer to give you business; they simply will not. Similarly, if you handle health care data, you must have HIPAA if you expect to get any business.

External motivators’ downside is that they can be more expensive and sometimes even frustrating to implement. Your information security guru, whether internal or consultant, may know more than your auditors about the risks, and can find himself or herself trying to convince an auditor that, no, that extra $1MM in spend to mitigate a certain risk is completely unnecessary, since the specific network they want you to mitigate has nothing to do, absolute zero connections, with the secure network!

I dealt with this precise situation at two clients who totally isolated their production network from their corporate IT network, but the auditor still wanted to impose PCI controls on the corporate IT network, at very high cost and disruption to the business! We did, eventually, get the auditor to relent, but the process was frustrating for all parties.

The benefit to external motivators is that the impetus does not come from IT, and, in the case of an “old-school” internally-focused technology lead, can be imposed on him or her. While it is always better to have a CTO/CIO who sees the business first and technology as just a tool to service that business, and thus builds partnerships and alliances with the revenue generator, not all businesses are so blessed. External motivators provide an ability to jumpstart the process from the business side.

Getting Everyone on Board

To successfully perform an information security review and come up with a plan, including which certifications, if any, you need:

  1. Understand why you are performing the review – external motivators, internal, or both.
  2. What certifications you need and why
  3. How to bring all parties – business and technology – on board for the process

When I have had the opportunity to work one-on-one and bring contrary parties together in partnership, the process – not just for information security but for any project – has been  a pleasure for me and a real success for the business.

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Free Wi-Fi Is Coming!

Free Wi-Fi is coming!

Well, perhaps not everywhere, but at every Hyatt hotel. I just received an email from Hyatt that they will offer free Wi-Fi for all guests in all rooms and lobbies worldwide, beginning 14 February 2015, just a month away.

How did Hyatt come to that decision? Why wasn’t it free before? What does it mean for their profits? Most important of all, what lessons can be learned for our businesses?

Since widespread WiFi adoption, hotels have had a 3-tier system for guest access:

  • Select service hotels, those that are family or long-term stay oriented, offer free WiFi. These include Hilton Garden Inn, Hampton Inn, Marriott Residence Inn, Hyatt Home, Hyatt Place, etc.
  • Full-service hotels, like Hilton, Hyatt, Marriott and luxury chains like Mandarin-Oriental and Shangri-La, charge fees ranging from $10 per day up to 3-4 times that for Wi-Fi access.
  • Elite frequent travelers, usually gold tier and above, receive free Wi-Fi everywhere.

The process of deciding what to offer, where, to whom and at what price, is “packaging”. In packaging WiFi, hotels have had three primary considerations:

  1. Willingness to pay / demand for service: Travelers to select service hotels are unable or unwilling to shoulder $10+/day for WiFi, while their need for it, especially at long-term stay hotels, is high. Free WiFi thus became an important differentiator in making the “package” appealing to those travelers. By contrast, guests choosing full-service hotels are looking for more luxury and service and more willing to pay for it, either themselves or by expensing to their employer. The whole package at these hotels requires the availability of WiFi, while customers are willing to pay for the privilege.
  2. Revenue impact: Offering free WiFi at a hotel means giving up a significant amount of revenue, at nearly 100% gross margin (all profit), in exchange for a greater appeal to travelers. Select hotels clearly required free WiFi to get guests. Will free WiFi at full-service hotels attract more profit from additional travelers than the lost WiFi revenue?
  3. Loyalty Perks: Travel services providers view providing loyalty perks as an important element of recurring revenue. People often choose to fly an airline or stay at a hotel because of the points or miles they accumulate and the status they have. For example, as painful as commercial air travel is, it is made a lot easier by having faster security lines, lounge access, economy plus seats, free drinks, first-to-board privileges, and first-out luggage, as well as dedicated customer service. Sure, you can buy all of these without status, but it adds up very quickly.

Over time, the value of all of these changes, and what needs to be included in the package changes as well. How has the market changed?

  1. More people are choosing to stay at select service hotels, both business and personal travelers. This is partially out of a desire to save money, but also because everything is included. There are no “nasty bill surprises” at the end, leading to a higher-than-expected cost of vacation or an impending fight with the employee expense department. The market, of course, is not segmented into “people who always stay select” and “people who always stay full service”, but rather more nuanced. Providing more in the “package” at full-service hotels will entice some who otherwise would stay at a select service to upgrade to full-service.
  2. Employee expense policies have been tightened. Travelers are encouraged to reduce costs wherever possible, and avoid any hotel extras. A hotel that offers more in the package can entice travelers to stay there without concern about violating corporate policy. It also makes it easier for individual hotels and chains to be on the “recommended” or “preferred” list of corporate travel departments.
  3. WiFi has become ubiquitous. Whereas ten years ago you had to pay for WiFi at many coffee shops, today people go to Starbucks for hours just to use the WiFi. WiFi has changed from an extra to an expectation.
  4. Loyalty has become less valued. Hotels and airlines have aggressively devalued their loyalty programs over the last five years, a clear indicator of reduced competition and less perceived loyalty value among the providers. To my mind, this is a serious mistake, but that is a topic for another day. Either way, the loss of sense of privilege for having free WiFi when everyone else is paying, the “I’m special” factor, is immaterial in its impact compared to the actual loyalty losses suffered by providers gutting their programs.

Hyatt deserves credit for willingness to reevaluate its package, but especially for its willingness to give up lucrative high-margin immediate revenue for strategic goals.

Every other business – including yours and mine – needs to evaluate on a regular basis what is in its packages, and determine where it can add items for free, where it can raise prices, what it needs to add to make it easier for customers to buy and stay.

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It’s About The People, Stupid

It has happened again. Another horror story of an airline leaving customers in miserable conditions for hours on the tarmac. This time, however, it happened multiple times over a 28 (!!) hour period.

According to the Jerusalem Post article, United Airlines Flight 84 from Newark to Tel Aviv in June:

  • was delayed without explanation multiple times
  • when explanations were given, they were patently false
  • required the police to come on board to remove the pilot from the cockpit
  • gave minimal food vouchers ($21 per person) for a day+ delay
  • gave passengers vouchers for a hotel that was half an hour away from the terminal
  • didn’t bother to arrange rooms at the hotel for the passengers

The list goes on.

This gives a whole new meaning to the term “Epic Fail” (which should be “Epic Failure”; the age of 140 SMS / Twitter characters seems to have mauled our English language).

The real question is, how did this happen? In a major hub airport, with thousands of staff and management, and not during some unusual event like a strike or snowstorm, how did trained staff with advanced computer systems, with apologies to Sir Winston Churchill, cause so many to suffer so much at the hands of so few?

The answer, something that appears to have eluded the United executive team, is that the system that failed here is not the computers, or the flights, or the crew scheduling computers. The system that failed here is the people… and the solution lies with the people.

The greatest leaders rarely are lawyers or engineers (says this former engineer). The reasons are simple:

  1. The world never is predictable
  2. People are driven by emotion

Engineers, on the one hand, really like predictability, well-designed systems, data, calculations. Lawyers, on the other hand, like to manage every circumstance, mitigate every risk, contract every situation. You cannot blame them; it is how they are trained, because that is their job.

Let us posit that the series of breakdowns that led to UA84’s June misery were not entirely predictable. That’s fine; the world works that way. Let’s also posit that the people behind the counters and in the United operations centres really want to be able to help customers. Not a single one likes watching people stuck in a plane on the tarmac, or sleeping on floors, or hungry. They really want to get these people to their destinations on time, safely and content.

The gap, then, is recognizing that these employees want to help but cannot. If you cannot predict every situation, then your employee manual should give a very simple two-step process:

  1. For all situations that the processes or systems in place solve the problem, use them.
  2. For all others, use your own judgment, and trust that we back you

If you read Gordon Bethune’s classic turnaround story about Continental, “From Worst to First“, one message recurs time and again: trust your employees. Gordon’s number one insight in turning around failing Continental was that employees wanted to help customers, wanted to be part of the best service business possible, wanted to take pride in their company. They just needed the authority and backing to do so. Once he gave it to them, all he had to do was focus on keeping the airline afloat short-term while the employees made it first class for the long haul.

United and Continental have deteriorated rapidly, not because of its employees, not because of its IT systems, but because management no longer views its job as making customers satisfied through happy employees.

In the end, as in the beginning, it is always about the people.

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Security Spending: Part II, the Good Tower

Today, we present the second guest post in the series by Ted Lloyd, editor of OnlineCISO.

Yesterday, we explored why security spending need not be a bottomless pit, and how yesterday’s tools, such as antivirus, can be evaluated using familiar risk management methodologies.

Where then, should a business reinvest the funds previously allocated to antivirus solutions? Another analogy to the physical world can help to answer this question.

Malware and variants are similar to microbiology in our physical world. Microbes such as bacteria and virus are microscopic, and cannot be seen with the naked eye. Yet, they cause disease and illness, sometimes even death. When they infect the organism, treatment is usually reactive such as taking antibiotics to kill off the infection. In much the same way as malware, microbes in our physical world are mutating and emerging as antibiotic resistant. Our antivirus software of today, trying to respond the advanced malware, is akin to trying to fight antibiotic resistant bacteria with yesterday’s antibiotics; ineffective.

How did physical science start to win the war on microbiology and what parallels can we make to the cyber world? Immunizations emerged and instead of reacting to the infection, sought to interrupt the process or execution of the infection and thus prevent it in the first place.

Getting back to our cyber world, funds previously invested in antivirus could potentially be invested in real time protection to interrupt the process or execution of the malware and this prevent the exploit. Technologies that monitor memory and detect malware attempts in memory, as well as those which protect key operating system functions are some examples. These types of protections can be deployed in real time alongside the real time malware attacks vs. the reactive nature of antivirus software.

Antivirus is just one example where businesses can rationalize security spending. It is a good one as it allows us to make many comparisons to the real world in non-technical terms, and easily lends itself to a risk based approach t decision making. The takeaway is that all security spending should be reviewed at least annually and ideally during the budget cycle to ensure that spending is still effective.

Unless businesses are willing to accept ever increasing spending on cyber security, hard questions need to be asked and answered vs. giving in to the hype:

  1. What are we spending on security
  2. Where are we spending it?
  3. How effective are our security investments?
  4. Can we achieve better results spending elsewhere, or even with less spending?

Answering these questions on a regular basis and making budget decisions based upon risk will enable business owners and executives to sleep at night. We cannot protect against all threats, but we can minimize them and mitigate the risks to the extent that our business does not suffer substantial harm when we are attacked.

Instead of investing more money, consider investing more due care and due diligence into rationalizing the most effective security investments for your business.

Ted Lloyd, CISM

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Security Spending: Part I, the Bottomless Pit

Today, we are honoured with the first of two guest posts in a series by Ted Lloyd, editor of OnlineCISO.

Cybercrime has emerged as a multi-billion dollar business and spawned another mufti-billion dollar business to combat it. As 2014 closed, Gartner estimates that global spending on information security will top $71 billion representing a nearly 8% increase in spending over 2013. The trend and trajectory are expected to remain steady for 2015 as well.

What business can afford these annual spending hikes? Rather, what business can afford not to keep spending, particularly when some experts in the industry are advising that businesses are not spending enough on cyber security? Failure to spend on information security might mean that a business could find itself out of business if attacked by cyber criminals, right?

Not exactly.

To be frank, any business needs to take cyber security seriously or potentially be out of business, although I do not sign on to the mantra that we must continually increase spending. Spending needs to be relative to the risks and needs to be continually evaluated for effectiveness. Technology is changing at such a rapid pace, that investments made last year may not be worthwhile investments this year; we may need to look at more effective investments in cyber defenses.

We live in a world dominated by technology, which makes it easy to be distracted into thinking that security is all about technology; it is not. Security is a business function and while many of the tools, as well as the assets we are trying to protect, involve technology, the decisions remain business decisions.

Insurance is a great example to consider. Insurance is a method of risk management, specifically one which transfers the risk. While not making the risk go away, we can make investments based on probabilities where the insurance company will agree to charge us a premium and pay any losses which occur as a result of the covered risk. The premium we pay limits our risk to just the premiums (and possibly a deductible), while the insurance company assumes the residual risk of loss.

For example, when we purchase a new fleet of vehicles, it makes sense to purchase collision insurance which pays to repair or replace those vehicles if they are involved in an accident. We pay the premiums, and that is the extent of our loss. However, as years go by, the once new and shiny fleet depreciates in value and reaches a point where the amount of money we are spending on the insurance premiums becomes more than we will recover in loss payments from the insurance company in the event of an accident. The investment no longer makes business sense, so we drop the collision coverage and accept the residual risk of loss.

Antivirus software is the cyber equivalent of automotive collision insurance. Once touted as the final line of defense – experts still recommend antivirus software on all end points – the investment in purchasing such software is very similar to continuing to carry collision insurance on a depreciated vehicle. It simply no longer makes business sense.

This last year, a senior VP at Symantec, a global security company and seller of the Norton antivirus software came out and said that antivirus was effectively dead, and no longer a serious profit center for the company. Worse, what has in the past been touted as a last line of defense, was disclosed by the same executive to only catch 45% of malware attacks.

The problem with antivirus software is that the technology has fallen far behind the capability of attackers and criminals. At best, antivirus software can identify known threats and exploits, but more often than not, and based upon the statistic above from Symantec, has very little chance of accurately detecting unknown attacks and exploits. There are millions of new malware, including the various permutations appearing each year. The reactive technology of antivirus simply cannot keep up with this pace.

Does that mean we should all stop using antivirus software? No, it does not. Antivirus software still affords some degree of protection even though it is not optimally effective. What this does mean, is that businesses should seriously consider not paying for their antivirus software in much the same way as they would consider dropping auto collision insurance.

Microsoft, for example, offers security essentials for free. There are other vendors such as AVG Free and Clam antivirus who also offer their software for free. Rather than continuing to pay for antivirus software, businesses should consider using a free solution and investing those dollars elsewhere for better returns.

After having understood that antivirus is not the end-all-and-be-all of information security spending, and need not be the bottomless pit, in part 2 we will explore where we should invest our security budgets.

Ted Lloyd, CISM

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Convenience vs. Efficiency, Guess Who Wins?

A year and a half ago, I wrote how Starbucks, early adopter and therefore, through its ubiquitous locations and preferred venue for professionals to work, a driver of adoption of WiFi, was driving adoption of “wireless” charging. Unfortunately, unlike WiFi, it wasn’t truly wireless, “anywhere within a reasonable range” charging, but rather more like “plugless” or “contactless” charging, using PowerMatters Aliance (PMA) mats built into their tables. Put your phone on the table and it charges.

In the last year or so, significant advances have been made in the effort to create truly wireless, “anywhere within reasonable range” charging. The net result, if successful, would be to “pick up” power to charge our devices anywhere within range of a base station, just as we “pick up” data to connect to networks and the Internet anytime we are within range of a WiFi access point.

uBeam has made a lot of headlines recently, due not only to its products, but also due to the backing of some very serious players, including Marc Andreessen, Mark Suster, Tony Hsieh and Marissa Mayer. In the meantime, Energous‘s WattUp made a splash at CES. Both of these use different technologies – uBeam with ultrasound, Energous with RF – but the concepts are the same.

In a conversation earlier this week with an investor who has a lot of experience in the energy space, he said that these companies have an efficiency issue. And he is right. Every medium loses energy over transmission. This is as true for gold connectors as copper wires as even fibre as trying to send electricity of data through a piece of rubber or plastic. Everything loses energy as the signal travels through it, which is why we have repeaters and limits on cable length. The question always is, how much will a medium lose?

Unfortunately, air is not a particularly good transmitter of signals.

  • Unshielded interference
  • Lots of different particles
  • Varieties of humidity, temperature and matter

Certainly, air is not as bad as trying to send a signal through silicone oven mitts, but it is far worse than a traditional copper cable. Cables are designed and manufactured to exacting standards. The metal along which the signals travel have a precise makeup to optimize conductivity and minimize signal loss. They are shielded, not only to prevent your electrocution, in the case of power cables, but also to keep leakage to the minimum possible.

Air has none of these benefits. As such, the maximum theoretical efficiency of a true wireless distribution system cannot exceed 70%, and is unlikely to be much better than 50% in a good situation.

To which I say, “so what?

It most certainly takes more power to transmit your Internet signal wirelessly around the house than it does to connect everyone with some Cat5 or Cat6 Ethernet cables… and yet just about every home and office has WiFi routers.

It will take a lot more power to transmit, well, power to your phone and table, and eventually laptop, wirelessly than it does to send it over a cable. And yet, when it is viable and safe and available at a competitive cost, it will be adopted broadly.

Why?

Because convenience trumps efficiency every time.

No matter how much we individually may want to reduce our energy costs, we will pick convenience over efficiency every single time. This is a big reason why electric cars have not been broadly adopted (in addition to concerns over cost and long-term value): a gas station is just that much more convenient, as I wrote two months ago.

Here is a simple experiment. Go ask your neighbour, friend, or spouse, the following 2 questions:

  1. How excited are you to cut your home energy bill by 5%?
  2. How excited are you to get rid of all of the laptop, tablet and phone plugs in your home?

Everyone wants both of those… but which one really got them excited?

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How Incredibly Good Airline Choice Has Gotten

I expect this topic to get me a lot of flak. After all, everyone likes dumping on the airlines, including me. But hear me out.

I fly a lot of miles every year, mostly in coach, sometimes in business. Most of the time, the journey is tiring and uneventful, sometimes it is annoying, and sometimes downright offensive.

I regularly hear and read stories about the decline of comfort, service and value in air travel over the last 30 years. Most recently, a friend forwarded me an article about how airlines have a financial incentive to “make you suffer.” When you are unhappy with the narrow seats in regular coach, you will pay more for premium economy or business.

By that argument, housing builders have an incentive to make you suffer. When you see how little space the small apartment has, you will pay them more for the townhouse or ranch home! Perhaps Toyota has an incentive to make you suffer; when you see how small the interior space of that Corolla is, you will buy a nice big Sienna!

That isn’t a “financial incentive to make you suffer”; it is called “having choices.”

Nonetheless, the article did cause me to pause and consider the question: has airline service gotten worse? I decided to look at the data.

Airlines for America, the trade organization for America’s airline companies (a.k.a. their lobbying arm), compiles data from the airlines and the Department of Transportation. This page lists the average annual round trip fares paid and miles flown, domestically (a different page show international), for each of the last 34 years. Data is courtesy of the US Department of Transportation, so it is reasonably reliable. All prices exclude all taxes and government fees, but include carrier-imposed charges, like change fees and baggage fees. In other words, the prices here are what airlines get from you, no matter what they call it. What governments get from you is excluded.

Let’s look at a 30-year timespan.

  • 1983: average total paid for a round-trip domestic fare was $246.66. The average miles flown per domestic round-trip journey was 1,955, for $0.126 per mile flown.
  • 2013:average total paid for a round-trip domestic fare was $385.54. The average miles flown per domestic round-trip journey  was 2,368, for $0.163 per mile flown.

At first glance, it certainly seems like the flying public is paying more and getting less. However, we must take into account ever important inflation. According to the official CPI calculator, $1.00 in 1983 was worth $2.30 in 2013. So let’s redo our total cost and cost per mile using 2013 dollars:

  • 1983: Average total price $568.13 ; average per mile flown $0.291 per mile.
  • 2013: Average total price $385.54 ; average per mile flown $0.163 per mile.

The average real price of a ticket has dropped from $568.13 to $385.54, or 32.1%. Further, the average 2013 ticket is a longer ticket, at 2,368 miles, so the average price per mile flown in 2013 dollars has dropped from $0.291 to $0.163 or 44.00%!

In layman’s terms, our tickets today are costing us about half what they did 30 years ago.

Airline travel has gotten dramatically cheaper.

OK, but what about the service? Well, coach service is widely believed to be much worse, while business class is believed to be better, with lie-flat seats/beds on many routes, food choices, video screens, etc. So let us look at business class.

I looked at the price of business class tickets on 2 round-trip routes:  New York to Miami and New York to San Francisco. All of these are relatively expensive markets. In all cases, I took the best prices between 2 and 6 weeks out, which is a reasonable timeline to get a decent but not fabulous price. The search engine I used is ITA Software’s Matrix, now owned by Google. In all cases, to keep consistent with the data, I excluded government-imposed fees and charges but included carrier fees. In other words, the prices are what the carriers get and keep from you.

  1. JFK-MIA-JFK is 2,179 miles, or fairly close to the average length for 2013. The best nonstop prices were as follows:
    1. $383.23 on Delta, or $0.176 per mile
    2. $565.58 on American, or $0.26 per mile
  2. JFK-SFO-JFK, is 5,172 miles. The best nonstop prices were as follows:
    1. $1088.16 on JetBlue, or $0.21 per mile
    2. $1655.81 on American, with similar prices on Virgin America, Delta and United, or $0.32 per mile

What Does All of This Mean?

It means:

  • In 1983, we paid around $0.291 per mile to fly, all in. These prices include coach and business averaged, although few people other than titans of business and movie stars ever flew business, but that is what we paid.
  • In 2013, we paid a similar or lower amount to fly in business, ranging from $0.176-$0.26/mile (JFK-MIA-JFK) to $0.21-$0.32/mile (JFK-SFO-JFK).
  • In 2013, we have an option to pay about half what we used to, and get a much less luxurious product.

The intervening 30 years have not brought us miserable coach. They have brought us a nicer and better business class product for the same price, and a new option to fly get lower quality for lower cost. We have choices.

Sure, we want business class service at coach class prices; competition within the industry and across new types of transportation may help provide it. But airlines aren’t “making us more miserable” for coach; they are giving us new, lower-class options that we never had before, while making the new luxury class cost roughly the same as the old coach.

What are the Airlines Doing Wrong?

Airline profitably is all about efficient operations and crucial financial metrics, like revenue per passenger mile. American Airlines kindly puts a great glossary online.

But the airline business, like any other business, is about customers who pay. The metrics only show how well you are running the backside of the house. In other words, airlines are not about the metrics, the metrics help measure the operations.

Businesses that are closely attuned to their customers know how to package, price and market their products so that customers are satisfied. An airline run by risk-management lawyers or financial wizards can think only in metric terms, see the trees but lose the forest. Here is a great, or terrible, example.

Lessons for Your Business?

When looking at your business, have you asked these questions lately? Do you know the answers?

  1. Are our products – including their packaging and pricing – correctly suited for our customers today and the foreseeable future? Or are they for yesterday’s?
  2. Do our customers understand the values of different offerings, and what it means to them?
  3. Do we present everything in a way that makes our customers happy with the deal they have received?

If you have not asked these questions, are stuck asking them correctly or do not know the answers, ask us. Don’t be the next misunderstood airline.

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Non-Innovation in Appliances

It has been almost five years since I last addressed appliances. Yes, those drab, dreary every day appliances that solve everyday and boring problems, like washing your clothes or dishes. While they now all have fancy LED screens and digital controls and stainless steel surfaces, at heart, the job is unchanged.

Unfortunately, most investment capital goes into “sexy” and exciting new ideas that can spread quickly at low cost, like games or social networks or online services. Many of these (definitely not all) are important and valuable. But washing machines have been fairly unchanged since their invention in the 18th and 19th centuries, and creation of electric machines in the early 20th century. This is partially because the returns take much longer, partially because the capital investment is much higher for all phases – product development, manufacturing, consumer marketing, sales & distribution – and partially because a few large players like LG, Samsung and Whirlpool dominate the market and the supply chain.

This week, at CES, two of them introduced their most exciting new “innovations”:

  • LG announced the Slim DD (for “Direct Drive”), a very short washer that fits right under an existing LG, like the fitted storage drawers they have sold for years. The purpose of the “Slim” machine is to provide a place to do a second light load simultaneous with the first, perhaps a smaller one or a delicate load.
  • Samsung has developed a machine with a built-in sink, so someone can pre-soak or remove stains right into the machine.

Apparently, this qualifies as “innovation”. I have to assume they are desperate, because there is not much of a market for any of these, and hardly anyone can call these “innovation”. How many people really are deeply troubled by the fact that they need to rinse out a few pieces of clothing every week (or every few weeks) before sticking it in the washer?

Similarly, while I will concede that designing a slim loading machine is impressive engineering – LG’s Direct Drive enabled it to build some large American-capable machines of up to 11kg = 24lbs, which is what a standard Whirlpool or Maytag takes, in the standard 60cm x 60cm of European washers – it is just another add-on. It is extraordinarily difficult to find even a single homeowner whose machine works 24×7, and thus is just dying to have a second slim machine to add on to the first.

Will your life suddenly improve because you can do a second smaller load at once, or perhaps not need to walk from the sink to the machine?

These manufacturers all make money off of selling large machines, the larger the better. They have zero incentive to really improve how laundry is done, nor any ability to think completely differently.

What are the really big headaches that could become innovation in laundry appliances?

  1. Speed: create a machine that can do a 5kg load in 10-15 minutes, rather than 10kg in 1+hrs, and takes up less than half the space. Machines have traded electricity and water usage for time in machine; it is time to take back the load time.
  2. Combination: create a machine that can take in a dry dirty load and put out a dry clean load without taking the total time. People buy washers and dryers because the machines are sold separately, but mainly because it allows some level of “parallel processing”. When the first load is in the dryer, the second goes in the washer. If it were a single machine that took as long as the two together, it would take almost twice as long for laundry from start to finish. Most companies have some type of combination machine that has sold poorly; who wants to take twice as long to do their laundry?
  3. Single wash: find a way to load 5-10 items in and have them clean and dry in 10 minutes.
  4. Folding: figure out a way to get the laundry folded. This is the last manual headache of laundry.

At heart, laundry machines are mid-20th-century “factories”. They operate in batch processing mode, while modern production has gone lean and agile, for good reason. The market is ripe for an entrepreneur to take the market away from them.

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