Consumer Behavior: Discerning and Capturing Value

I can’t help but think of the Steve Jobs book, and all of the stories on his product focus.. from the curved lines around icons, to the curved back of the iPad. What do CEOs focus on today? How many of them really know why their customers use their product?

11 May 2013

Thought I would take a few moments before my Saturday Tennis match to discuss a top “success indicator” as a prospective investor: Consumer Behavior. I probably entertain 5-10 calls per week on new payment ideas.. my worst experiences are from individuals that start “I have a patent around…”… my eyes close I take a breadth, try to appreciate their personal energy in putting themselves out there, and then go on to encourage them to find a customer and ring me again.flock of migrating canada geese birds

For the calls that go through the next stage, I like to start with an understanding of the customer experience.  Why? Well establishing a great experience can build adoption like wild fire… but most new founders make very poor assumptions on how consumers will change behavior.  For example, consumers taking mobile phones out of their pocket, launching an app, connecting to wi-fi, and walking around a store looking for deals (every time they shop). When it comes to making assumptions on consumer behavior, Big companies suffer from the same problem. Where is the experience in bringing big new consumer offerings to market?

A few of my Fortune 50 examples hail from online banking (I was fortunate to have teams responsible for online at both Citi and Wachovia).  One of my biggest learnings by far was focus on customer at Wachovia… what do they do? What do they like? What don’t they like?.. what are the primary behaviors? By customer segment? Why do they bank with us? What do we do better?  Its just amazing what you can learn from your customers!

In the online banking space, my teams always faced a wall on the limited time consumers spend on banking sites. In retail banking (where you move money and pay bills) consumers log on an average of 4 times a week. They typically spend about 3-4 minutes as they.. check a balance, pay a bill.  Customers with self directed brokerage accounts have much higher interaction (perhaps 4-8 min), and Credit Card only customers have much lower interaction (Less than once per month, with active users of around 40-50%, compared with 80%+ for retail). One thing remained constant across all banking segments.. customers DO NOT explore the site… or expand beyond the task which they want to accomplish. 90%+ of all consumer interaction proceeds along 3-5 core behaviors. Customers come to online banking with an objective.. NOT TO SHOP.

This is one reason I’m very suspect of card linked offers. Consumers don’t go to their bank for “deals”, to check reviews, … to poke around what they could possibly get. Of course that could change..  if consumers were able to receive some sort of substantial value.. something they could get no where else.. .  But the effort to CHANGE BEHAVIOR is SUBSTANTIAL. It is much more than delivering a fantastic consumer experience, and delivering differential value, AND doing this consistently, it involves MUCH MORE (ex. existing behaviors, loyalty, Social factors) . In the CLO example, the consumer behavior change entails BOTH an online behavior (navigating offers), and a physical behavior (selling offers to merchants, assessing effectiveness vs. alternative, targeting, redemption, loyalty). Consumer PROFITABILITY for the merchant is also VERY DEPENDENT on consumer demographic. (See my CLO Blog).

Social factors are the primary drivers of commerce related behavior change (IMHO). What do your friends say? Community? This is the core of what makes Amazon and eBay great. The importance of Social factors shouldn’t be much of a shock, as we see this in how bees swarm, how ants find food, how birds fly.. all patterns that have a significant social component. This is why I remain very high on Facebook’s valuation.. as they have much room to leverage social networks for BEHAVIOR CHANGE.

Speaking of change, if you were going to influence someone: A) would you want them to come to you? Or B) would you go to where they already are? This is the key to evaluating any new concept…. Business plans that reach customers within their current patterns of behavior have a much lower risk. Where do you spend “open” time today? time that could be used more effectively? Airport? Google? In the Car?

This is why I love Square.. they aren’t telling the customers to carry something new, or to go somewhere they haven’t shopped before.. they work to make established behaviors stronger.. with a better customer experience.

Another example in the payments world is Payfone… consumers already use their connected devices to pay for things.. why do I have to type in all of my address, card information, …etc into a little mobile screen.. why can’t the carrier just send it over and fill it out for me.. they know my phone.. they know my information.

On the negative side I would put NFC. Consumers must buy a new phone, get their banks to provision a card, depend on a new merchant terminal type to wave their phone… Oh.. and the BIG ELEPHANT.. there are no NFC enabled debit cards.. which happens to be the primary way consumers pay for goods in the US. Also the only banks within the ISIS wallet are the ones that paid $1M to have their cards in the wallet. In the end NFC is slower, more expensive, harder to use, and has fewer options.. why is this a good thing for the consumer? Like a toll bridge with a 5 hour wait.

The best quote on the NFC topic was from a Top 5 global retailer “Tom NFC is like a toll bridge, but the telecos don’t want $2 to cross their bridge, they want 3% of what is in my truck.. and the entire shipping manifest… I think I’ll just find another way to cross…”

I can’t help but think of the Steve Jobs book, and all of the stories on his product focus.. from the curved lines around icons, to the curved back of the iPad. What do CEOs focus on today? How many of them really know why their customers use their product? At Wachovia, our CEO Ken Thompson called over to our team to tell us he had problems logging in.. It turns out he didn’t know the difference between his User ID and his Password.. as he transposed them.. yes this should have been an indicator, this same  brilliant man who bought Golden West with no due diligence (subsequently forcing liquidation to WFC).

For entrepreneurs, there are 100s of opportunities to build value where the consumer already is. Much of this revolves around helping existing entities build better relationships (like Square, Fishbowl, Payfone, Payments Enabled CRM, …). Along these lines there has been a sea change in the Valley over the last 18 months.. B2B is in, while NEW consumer brands and app companies are facing a much more challenging funding environment.

Even in this space, companies with stellar funding and boards can make terrible business decisions. My top example would be ShopKick.. why on earth would any retailer want to support little speakers in a store to help consumer’s earn kickbucks.. ? Am I really going to keep my phone on, and load an app when I walk in to Target .. looking for “deals”?  Why would Target or BestBuy want to let consumers earn value outside of their own brands? Both of these retailers would probably say.. “we were just playing around to learn some lessons”.. which makes perfect sense.. unless you were a ShopKick investor.

There is enormous Value in existing patterns.

A WalMart exec provided my top retail insight for the year. “Tom it doesn’t matter what ad our consumer sees, or where they see it.. when they decide to buy the product.. they will come to us.. “.

Walmart’s Everyday Low Prices (ELP), has helped them establish tremendous loyalty with their consumer base. They have been able to expand upon this trend and offer other services, from telecom (straightTalk), to Financial Services (Bluebird, moneygram, greendot, check cashing, …).

Before you run out with a business plan to help WalMart, remember they are the rocket scientists of retail.. and their procurement group are all from the Manhattan project. As they all excel in ensuring the value which is captured remains in WalMart. They have established a behavior pattern where consumers TRUST them for every retail interaction.

Thus not every pattern is valuable, or can be influenced easily. One of the things my online and payments team did at Wachovia was PFM. In fact we were the largest PFM bank in the world at one time (as we gave out the software for free to certain consumer segments). The consumers loved the software.. they were addicted to it.. problem was that it did nothing for me (Wachovia).. I wanted people to come online. It also turns out that consumers that use quicken are VERY literate financially. In fact, they were one of our least profitable consumer segments (with exception of wealth and self directed brokerage).

Their loyalty was to Quicken, over and above my bank… I needed that to change. In order to get them online I stopped the OFX connection service and told consumers that download was available only through the website.. online was my “virtual branch” and a a very important interaction.. I didn’t want consumers to think their bank was like a water utility..  we actually had a store (where we wanted to see them).. and thus wanted to reinforce an ONLINE relationship. Consumers who had historically used PFM used online banking very infrequently.. but when we forced the behavior change…  they realized that we offered much of the “PFM lite” capability… and were successful in converting most.. We did loose some.. (although we did not  touch wealth or small business customers).. others that were furious, but they were not profitable to begin with. Therefore it was a necessary change, we had to deliver value through our brand, not Quicken (or the now defunct MS Money), we had to disintermediate them.

I had a chat with the head of mobile at one of the banking teams… building a great new mobile offers service. He spoke about all of the alerts, the UI, the content..  I  said you are competing with: Facbook, Google, Groupon, Cardlytics, Shopkick, Foursquare, Visa, MA, ISIS, … and every other bank. All have alerts.. all have the same content. When I’m walking down the street am I going to have 8 different apps that all alert me to the latest deal? Is that really your vision? He said “no… honestly of course not.. but hey I’m only compensated to get this project done.. “ That certainly gives perspective on how Fortune 50s attack the problem.  In fact they are not solving any problem, but rather take a view on CAPABILITY (“we can do this”) vs. Strategy.. imitating just one facet of a successful business plan.

I could go on and on in stories.. but let me wrap this up with some of my Rules of thumb

  1. Consumer change not possible without a 20-30% change in the value proposition.
  2. Delivering consumer “Value” for free is much easier than making money at it (ie Twitter). Consumers don’t like to pay for anything. So how do you monetize the service? Can you really execute an advertising model?
  3. Who will deliver the “value”? How is value created? How will it be sustained? What can one of the 800lb gorillas do to crush you? How will you respond?
  4. What are your data dependencies? Who owns your data? Companies which add value on data they do not own resemble service provider revenue.. companies that own their data can exponential rev multiples.
  5. Loyal customers are by far the most profitable. Customer acquisition is just the first, easiest phase.. loyalty means delivering value everyday.  Is there a new value “chain” or does current success mean just reaching a new audience with current value proposition. How is loyalty established (although not every business is dependent on loyalty… ie gas station).
  6. Customers are not “Owned” by a bank, a business, or a service. Every entity claims a customer is “uniquely” theirs. The next phase of innovation will see greater collaboration between non-competitors around a common customer (Coke and McDonalds, Google and Everybody, …)
  7. Time to Market. Multiply number of parties that must do something new by 2 yrs to get total time to execute (Consumer, retailer, teleco, bank, payment network, …). This is the Apple advantage… NFC has 12 parties.. so that means 24 yrs.
  8. Consumer Facing. It takes $10M in marketing to acquire every 1M during early stage. Exception is around socially led change, or existing services that expand.
  9. Payments and Other Networked behavior involve much longer “Trust” behavior change on a 20 yr cycle. The early adopter “techie” demographic is under 10% of consumer base and NOT an accurate representation of all consumers
  10. Dependency on demographic alignment with business. Different consumers matter to different businesses. WalMart has very broad offering, Neiman Marcus a much narrower one.. The processes by which consumers are reached (advertising), select goods, develop loyalty, and purchase is complex. Few entities can deliver value to all consumers or to all retailers. Thus what is their focus, and how can it mature?
  11. Experience in rolling out direct to consumer offerings. Is the business looking at their customers? What else do they do? What other problems do their customers have?

6 thoughts on “Consumer Behavior: Discerning and Capturing Value”

  1. A truly great post, Tom. It echoes most of the things 99% of Fortune 500 other there don’t get at all. Thanks for sharing (and not charging for it – you’d be surprised how many consultants out there ask for money every time they teach your granny how to suck eggs). Kudos!

  2. Tom – Great post! Here’s my rule of thumb…Consumer behavior only changes when the value delivered to the consumer exceeds the hassle of the behavior change.

  3. Tom, these are great insights. With “very new products,” we find that companies (enterprises and startups) and analysts often overestimate market size and underestimate the time and resources required to achieve success.

    Calibrating demand for new-to-market products is especially difficult, as it’s challenging to get a valid read on likely consumers’ response to a product they have never experienced. As a consequence, investors and cos make Type I (overestimating) and Type II (underestimating) errors.

    You might be interested in our discussion of challenges here and solutions here Useful strategies including crafting and testing a “fully elaborated” Value Proposition (, allowing respondents to view/interact w/ “high fidelity” prototypes, and systematically testing variations (features, pricing and offers) using methods such as Choice Modeling.

    Dr. Phil Hendrix, immr (@phil_hendrix)

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