Quantipulation In Action: Inbound Vs. Outbound Marketing

Mashable (that highly reputable source of marketing theory and research) recently published an article called Inbound Marketing Vs. Outbound Marketing, which claimed:

“Thanks to the Internet, marketing has evolved over the years. Consumers no longer rely on billboards and TV spots — a.k.a. outbound marketing — to learn about new products, because the web has empowered them. It’s given them alternative methods for finding, buying and researching brands and products. The new marketing communication — inbound marketing — has become a two-way dialogue, much of which is facilitated by social media.

Another reason why inbound marketing is winning is because it costs less than traditional marketing. Why try to buy your way in when consumers aren’t even paying attention? Here are some stats from the infographic below.

–44% of direct mail is never opened. 
–84% of 25 to 34 year olds have clicked out of a website because of an “irrelevant or intrusive ad.”
–The cost per lead in outbound marketing is more than for inbound marketing.”

My take: Total garbage. This attempt on the part of people looking to differentiate the “new” marketing from “old” marketing completely misses the boat. 

Let’s look at this point by point:

“Consumers no longer rely on billboards and TV spots — a.k.a. outbound marketing — to learn about new products.” Who said that consumers relied on billboards and TV spots to learn about new products? Marketers relied on billboards and TV spots to make consumers aware of their products, to increase recall of their products, and create positive affinity. As long as people continue to drive along the highway (how’s the commute in your city? Yeah, sucks in mine, too) and watch TV, marketers will find that billboards and TV spots to be at least somewhat effective at those objectives. 

The new marketing communication — inbound marketing — has become a two-way dialogue, much of which is facilitated by social media. Got news for all the inbound marketing alarmists out there: Marketing has always been a two-way dialogue. It just wasn’t as easy to execute as it is today. Marketers have relied on various mechanisms — postcards, focus groups, toll-free phone numbers — to encourage feedback from consumers. Claiming that the “old” marketing was “one-way” is false.

44% of direct mail is never opened. First off, how do they know that? Think about how much direct mail you get. I challenge you to come up with even a reasonably accurate estimate of how much of it you open and how much you throw away before opening. Second, even if this were true, then I’d say: WOW! More than half of direct mail is opened. That’s pretty damn good in this marketing environment!

84% of 25 to 34 year olds have clicked out of a website because of an “irrelevant or intrusive ad.” What the hell is wrong with the other 16%?

The cost per lead in outbound is more than for inbound marketing. Stupidest claim I’ve heard all month. Just because there is no measurable media cost associated with this thing you call “inbound” marketing doesn’t mean there aren’t costs associated with the efforts. Somebody has to create and manage the social media site, right? Or, if the inbound marketing channel is the phone, do the costs of staffing the call center not count as part of inbound marketing efforts? And given the incredibly inexact science of attribution in the marketing world, how does anyone really determine that a generated “inbound’ lead wasn’t influenced by outbound marketing efforts?

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The infographic included in the Mashable goes on to claim that in the “old” way of marketing, marketers rarely sought to “entertain or educate.” Seriously? The ad industry has a RICH history of attempts at being funny and entertaining. Print ads have LONG been focused on education. 

The article also tries to differentiate “new” marketing from “old” marketing by claiming that in the new marketing, “customers come to you”, while in the old marketing, marketers sought out customers. 

Customers come to you? Really? And how do they find out about you? Simply by word-of-mouth? Good luck with that. Listen to what Groupon had t say:

“After a two-year holdout, we finally decided to run real television ads. In the past, we’ve depended mostly on word-of-mouth and limited our advertising to online search. This year, we realized that in spite of how much we’d grown, a ton of people still hadn’t heard of Groupon, so we decided to give in to our Napoleon complex and invade the rest of the world with a proper Super Bowl commercial.”

Bottom line: Trying to make inbound marketing sound like something superior and new is total BS. Marketing is a complex process. There are parts of the process that are inherently outbound and parts that are inherently inbound. There are new channels of communication that create new opportunities for both outbound and inbound communication.  Oh, and real marketers don’t take marketing advice from Mashable. 

I Regret To Inform You That My Blog Fees Will Be Going Up

Many of you have been reading this blog for the 2+ years of its existence for no charge. Well, my little freeloading friends, this is the end of that party.  Beginning December 1, I will be instituting the following fees for reading this blog:

  1. Blog reading fee. Lifetime free readership will no longer be available. Per the terms of our agreement — that the end of anybody’s lifetime allows us to revoke the offer — free readership of this blog will no longer be offered. Starting December 1, you will be charged a $.25 fee for each blog post you read, whether you link directly to the site, view it in a reader, or are simply subscribed to it at the time it was posted.
  2. Subscription reversal fee. Requests to unsubscribe from this blog will be assessed with a $25 premature disconnect service charge. At this time, subscription reversal requests cannot be taken online, as my eCommerce site is currently down for scheduled maintenance. Please mail your requests to the home office address, which can be found on my eCommerce site.
  3. Inactive reader fee. For every week that goes by in which you do NOT read a blog post, you will be assessed a $.50 fee. For any month in which you do not read a single post, a $5 charge will be levied.

In an effort to be transparent, however, I think it’s important that I explain why I’m forced to institute these fees:

1. Higher debit card fees. Starting October 1, new debit card interchange fee regulations took effect. Even though these changes only impact banks with assets greater than $10 billion in assets, I figure that if this excuse works for Redbox, then it should work for me.

2. The Barbara Lee effect. Ms. Lee, a member of the House of Representatives, recently commented that she doesn’t use the self-checkout lanes at supermarkets because  “that’s a job or two or three that’s gone.” If there are more people like her out there — who stop using self-checkout lanes, ATMs (because they take away bank teller jobs), self-service gas stations (because they take away gas pumper jobs), or E-Z pass on the highway (because you know we can’t afford to lose any more toll taker jobs) — then the result will be higher prices for lots of things. In anticipation of this mass lunacy, I’m afraid I have to raise my prices.

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In a little more seriousness, there is a message here for marketers.

While I fully support the right of any business in this country to raise its prices, and shoot itself in its foot (or head) by doing so, firms that feel the need to raise prices WITHOUT committing PR suicide must do so with caution, transparency, honesty, and proactive communication.

Redbox’s announcement is shameful. They might have well as blamed foreign currency fluctuations in Uganda. There’s a large financial institution (who shall remain nameless lest they find out I’m blogging about them) that should’ve been a bit more sensitive about how it announced its recent price hikes. I would mention Netflix, but I have a professor/ad agency friend in the LA area who would jump all over any comment I might make about them.

Price changes are lightening rods. You might be able to mute the thunder, but people still see the sky light up. And then like to point at it and talk about it.

Someone Should Get Fired

Check out this opening paragraph to an article titled How strategic is our technology agenda? in McKinsey Quarterly:

“The CEO of a leading consumer goods company was unhappy with his CIO. An important competitor was gaining market share at a disquieting pace by using social media and data analysis to target customers more effectively. When asked about these developments, the CIO outlined some potential responses, but he didn’t follow through on them. Instead, according to the CEO, the CIO remained preoccupied with “keep the lights on” IT projects and was therefore unable to gain traction with the business leaders and others within the company who would be critical in helping to address the new competitive challenge.”

My take: Someone should get fired. I’m just not sure if it’s the CEO, the firm’s CMO, or the authors of the article. But I’m pretty sure it’s not the CIO who should get canned. 

Why should it be the…

CEO? If IT isn’t “strategic” within an organization, it’s not necessarily the CIO’s fault. I’ve worked with plenty of CIOs who have tried to make IT more strategic, but find that the processes, the org structure, and the management mentality required to make IT strategic aren’t in place to make it happen. 

In a report I published a while back called Bank Performance: Why IT Management Matters, I found that it doesn’t matter which technologies a firm uses. What matters is how a firm manages IT. The “how” of IT management is comprised of three dimensions: 1) Tolerance of IT risk; 2) Senior management support of IT; and 3) Coordination between IT and business functions.

What my researched showed was that firms (in this case, banks) that have a high tolerance for IT risk, have strong senior management for the use of technology as a business enabler and differentiator, and demonstrate tight coordination between the IT department(s) and lines of business are more profitable than other banks. 

In other words, for IT to be strategic, it takes more than just a bottom-up drive from the CIO’s organization. 

Another [big] reason why the CEO is a candidate to be shown the door: Why is going to the CIO with a problem related to social media and data analysis? 

This takes us to the second candidate to get the axe…

CMO? If a CPG firm is losing market share because it isn’t leveraging social media or successfully executing data analysis, the fault for this doesn’t lie with the IT organization, it lies with the marketing organization.  

The McKinsey article also contains the following passage:

“Vocal business unit leaders at a North American insurance company, for example, insisted that sluggish times to market for new products were an important factor behind its eroding market share. They also believed that poor IT systems—specifically, the software that supported pricing and helped adapt insurance products to local regulatory requirements—were responsible for the lagging product-development performance.”

Hogwash. I believe full well that IT systems might be a negatively influencing factor in the firm’s time-to-market for new products, but the fault in this situation lies with the inability of the lines of business to effectively make the case for investing in an makeover or overhaul of those applications. IT can help the business understand the technology implications of investments, but it is the business’ responsibility for making the business case for investments that improve its performance. 

In the case of the CPG firm referenced at the beginning of the article, the CMO would appear to be seriously derelict in his or her duties to not be included in the CEO/CIO discussion. 

Which takes us to the third candidate(s) to be fired…

Authors? I don’t want to call anybody a liar here, but I don’t believe the CEO/CIO conversation actually happened. “Leading” CPG firms (McKinsey’s adjective) are generally marketing-driven firms. I don’t believe the CEO of a “leading” CPG firm would turn first to the CIO — and not the CMO — to discuss an issue with social media or market share. 

Maybe the authors took some poetic license for the purpose of the article. If so, I’m OK cutting them slack and not firing them for this relatively minor offense. 

See? I can be a nice guy.

Bank Transfer Day Needs A New Name

Bank Transfer Day is a gawdawful name. I saw one CU person’s tweet alluding to it as BTD. Ugh.

What the hell does it mean? Transfer your money from one bank account to another?

Yes, I know full well it’s about moving your money OUT OF a bank (and into a credit union).  But how is that obvious to the 99%? 

One friend (who shall remain nameless unless he tells me it’s OK to attribute this to him) suggested calling it Tell Your Bank To Shove It Day.

Now we’re talking. 

How about CU Later Banks! Day? (Or is that too obvious?)

Or maybe Break The Bank Day is better. On second thought, Durbin’s already pretty much proclaimed 2011 to be Break The Bank Year.

Spank Your Bank Day is another option. Too violent?

I don’t know what the right answer is, and it doesn’t really matter what I think since nobody is going to change the name based on what I have to say. But maybe I can get the powers to be to rethink the name.

Having said that, who are the “powers that be”?

If you know, please let me know. Because after I ask them to change the name, I’m going to suggest that they change the date. Doing this on a Saturday isn’t the best idea.

And who came up with that picture? It looks like The Joker from the Batman series and movies.

What do you think the day should be called?

Banking The DeBanked

How’s this for coincidence: Today, Aite Group published my report Marketing Prepaid Debit Cards To Overdrafters and Harvard Business School published a white paper on overdrafters titled Bouncing Out of the Banking System: An Empirical Analysis of Bank Account Closures. 

The write-up on the Harvard paper included this comment:

Between 2000 and 2005, United States banks closed 30 million checking accounts of excessively overdrafting customers. It’s a significant action because people whose accounts are shuttered have to turn to costly fee-based alternatives to receive banking services—if they can get them at all.

My take: Hogwash. A load of populist crap. 

If a consumer is paying hundreds of dollars a year in overdraft fees, then why would an alternative product  like a prepaid card be considered a “costly fee-based” alternative?

As part of their marketing strategy, many prepaid card issuers target overdrafters. The challenge, however, is that Aite Group’s research found that prepaid card issuers’ overdrafter opportunities aren’t as lucrative as they might think. The majority of overdrafters pay an overdraft fee just once or twice a year, making the economics of switching their banking activity to a prepaid card less than worthwhile.

In fact, many overdrafters won’t switch to prepaid cards based simply to avoid paying overdraft fees alone. Low awareness of prepaid cards among overdrafters is a hurdle that prepaid card issuers must overcome before they can effectively market the product.

But there is a segment of banking customers that are looking to switch — or have already done so. These are the Debanked — consumers who choose to opt out of the traditional banking product structure, and opt to manage their financial lives with products that are typically considered to be “alternative” financial products.

There are two problems with the populist view of the market, so often adopted by ivory tower college professors and newspaper-selling journalists:

  1. There’s a portion of the “unbanked” population that consciously chooses to be part of this population and is NOT in any way, shape, or form “victimized” by the financial services industry, and
  2. Alternative financial products, many of which have fees associated with them, are not inherently evil, predatory, or economically disadvantageous to the consumers who use them.

There is a significant business opportunity for both banks and providers of alternative financial solutions (i.e., prepaid cards, check cashing services, etc.) to identify the DeBanked and potentially DeBanked consumer population and craft solutions for this market. (Sorry, can’t get into more details here–that’s what my Aite Group report is for).

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Check out Snarketing 2.0: A Humorous Look at the World of Marketing in the Age of Social Media (print or Kindle format):

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The Future Of Movenbank

If you need a refresher course on what Movenbank is, allow me to steal this passage from TheNextWeb:

It’s an exclusively online, new model of bank that uses social, mobile and gamification technology. To create a bank focused on utility and customer engagement, Movenbank created an ecosystem called CRED, which uses a combination of mobile technology, social media and behavioral game theory to help consumers save, spend and live smarter when it comes to their finances with a built-in reward system.

Here’s how the Movenbank story is going to play out:

Act I: Start-up generates positive press and attention for promising to create new banking model. New firm takes precautions to not get overhyped (like a previous new banking startup) too far in advance of its launch. Fledgling firm signs up 100,000 potentially interested customers.

Act II: With much fanfare, Movenbank launches, but small percentage of interested prospects sign-on. Management team is undaunted as they know full well that too many customers on day one might be more detrimental than helpful. After all, on day one Federal Express flew one plane, not thousands. 

Act III: The dark and lonely times. Movenbank works diligently to acquire new customers. Slowly but steadily new customers come on board. People begin to question the firm’s business model. 

Act IV: Movenbank prospers. Customers find that they can earn their way to better rates and fees, and grow with their existing account instead of switching. More importantly, customers are profitable. While other (i.e., traditional) banks have varying degrees of success driving up account profitability, Movenbank is able to do so through a blend of interchange, merchant-funded incentives, and yes, account fees. As the new model is validated, kinks are worked out, and word of the success of a new banking model spreads, helping to drive new customer growth at a much more effective and efficient rate. 

Act V: A megabank acquires Movenbank.

Huh? What? Why would a big bank acquire Movenbank? 

It’s a classic innovator’s dilemma. Today’s banks would desperately like to reinvent their business model. But, as they say in Maine, “you can’t get there from here.”

But why will Movenbank succeed?

It’s not because it’s a mobile-dominant plastic-less approach (I predict that Movenbank will one day issue plastic cards).

Movenbank will succeed because the product offer is more appealing, simpler, more transparent, and more fair than the [checking account] product structures on the market today.

The OccupyWallStreet people might not like to believe this, but the real 99% of people in the U.S. are OK with paying fees for the products and services they receive. What this majority wants, however, is perceived value for the fees paid. THAT’S the problem with the banking model today — mismatch between between fees paid and value received– and the problem that Movenbank is trying to solve for.  

In addition, the timing helps. While it’s always the right time for some firm to introduce innovation into the market, now is a particularly good time. It’s the perfect storm of economic conditions (producing strong consumer dissatisfaction with banks in general), technology development and — most importantly — demographics. 

Ten years ago, even if the economic conditions and technology had been in place, the demographics wouldn’t have been there. Today’s Gen Yers were just too young ten years ago to make a Movenbank possible.

Which isn’t to say that Movenbank’s only customers will be Gen Yers (just ask PNC about the demographics of its Virtual Wallet customer base). But Gen Yers need more than mobile access to their accounts, or a pretty interface. They need a new product. A product that reflects the fact that their spending and credit needs are rapidly changing.

The organizational walls between debit and credit products in most established financial institutions prevent them from creating and developing new solutions like the one that Movenbank is promising to bring to market.

By Act IV, big banks will take notice of Movenbank and realize that Movenbank is:

  1. The “starter” account they should have created for entry-level customers, and
  2. A platform and business model upon which they can migrate their stale and tired business model.

This, by the way, is why I don’t think Bank Simple’s path is similar. Bank Simple may succeed at creating a new interface for banking customers, but the underlying structure and business model of banking products remains in place. Maybe I’ll be proven wrong here, but I see Bank Simple as simply (pun intended) putting lipstick on the pig.

With that said, I may be wrong about Movenbank, as well. There are a number of failure triggers:

1. Model failure. CRED might not work. From two angles, actually. One is that Movenbank may not be able to collect a sufficient amount of data to validate the CRED concept. The other potential failure angle is that Movenbank may not be able to recalibrate CRED over time. This is what happened with FICO. A 600 score was significantly more risky in 2009 than a 600 score was in 2002. 

2. Technology failure. Movenbank is putting a lot of faith in the mobile channel. Not that it’s misguided faith. But the mobile channel– most importantly mobile payments and mobile customer service — has yet to face its toughest performance, reliability, and risk/fraud management tests. 

3. Service failure. You know why ING Direct succeeded as a primarily online-only bank? Because savings accounts require little customer service on an ongoing basis. That’s not the path Movenbank is taking, however. Quite the contrary — it wants to be the provider of the primary spending account. And with a heavy-transaction product comes heavy-customer support needs. Will Movenbank have the customer service capabilities to support a sizable customer base? We’ll see.

There are three additional failure triggers that I can define, but won’t talk about here. If Movenbank wants to know what they are, it knows where to find me. 

Bottom line: I’m bullish on the Movenbank concept. Sadly (for the industry) there aren’t enough people thinking about how to (constructively) reinvent the banking model. Too much focus is on improving the “customer experience” without fixing the underlying cause of the experience problems. Or blowing it up completely.

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Check out Snarketing 2.0: A Humorous Look at the World of Marketing in the Age of Social Media (print or Kindle format):

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The Hidden Costs Of Social Media

I’m really tired of hearing social media gurus preach about how social media will transform marketing. They usually can’t explain why this will be the case. And when asked for examples, they often cite people in the Middle East tweeting during a revolution. Which is great, but has nothing to do with marketing. 

If there’s a transformative potential for social media, it lies in this: The incremental cost of communicating with customers and prospects is, for all intents and purposes, zero. 

This has, until very recently, never been the case. 

Prior to the advent of email, the cost of communicating was high. Marketers either used mass media avenues (TV, radio, print) or direct mail. The cost per message was high. 

As a result, the return on investment per message was important. Each message had to pay its way. And that’s why obsessed over response and conversion rates.

Social media brings the cost of messaging way down. As a result, marketers don’t have to obsess over the ROI of each message, allowing them to shift the nature of communication from persuasion to engagement. In a world where every message doesn’t have to have an ROI, we can actually carry on a conversation with customers and prospects. 

But most marketers are missing something important as the economics of marketing change:

Costs shift from message distribution (dissemination) to message creation.

In the old world, marketers did spend a lot of money in crafting their message (witness the size of the advertising agency business). Despite this cost, more was spent on disseminating the message than creating it. After all, the message was created ONCE. Then tested, revised, and launched. And then the bulk of the marketing cost was in getting the message OUT.

Marketers in the new world have new mechanisms for getting the message out thanks to social media tools and channels. Tools and channels that radically slash the cost of dissemination.

But what too many marketers don’t realize is that there’s a new cost in town: The cost of message creation. 

Too many marketers don’t have a clue how to have a conversation with a customer or prospect through social media. Either they tweet or post their tired old marketing messages, or they deal with customer service requests. But marketing messages designed for mass media channels are inappropriate for social media channels.

I guess I can only speak to the financial services industry here, but there’s not a single financial institution that I’ve talked to — and I talk to a lot — that consciously think about the mix of messages they disseminate through social media (i.e., the mix between marketing messages, educational content, news alerts, and other types of messages), nor do they test and refine the messages they disseminate. 

Thanks to social media, the cost of marketing is shifting from message dissemination to message creation. And that’s not a grammatically correct sentence, since it’s about messages — in the plural — today, not the message. 

Seth Godin wrote that “marketing is the story marketers tell consumers.” That’s simply not accurate. It’s “stories” in the plural (and if you want to be even more correct, it’s not about the stories marketers tell, but the stories that marketers get consumers to tell). 

It’s hard to equate a tweet or Facebook posting to a story, but this is mincing words. It’s about the message. More frequent — and more meaningful — engagement with consumers, means having more frequent and meaningful messages and things to say. 

The cost of creating those messages, and understanding which ones are most effective, is the hidden cost of social media.

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Check out Snarketing 2.0: A Humorous Look at the World of Marketing in the Age of Social Media (print or Kindle format):

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Are You A Snarketer?

By my calculations, if I can sell 23.7 million copies of my new book, Snarketing 2.0, within the next two to three years, then I can retire.

That would require everyone who qualifies as a Snarketer to purchase 2,370 copies of the book, however. So it doesn’t looks like I’ll be quitting my day job any time soon.

This is the problem with trying to get rich writing business books: There’s a limited audience. There are only so many people who are even potentially interested in the topic.

I’ve got an even bigger problem: My audience is more narrow than the typical business audience. The target audience for my book is a group of business people known as Snarketers. Are you a Snarketer?

You are if you meet three qualifications: 1) You have an interest in marketing; 2) You have an unusually high degree of intelligence; and 3) You have a warped sense of humor.

For your friends who can’t process that intellectually, show them this picture to explain to them why they don’t qualify.

I’ve done the research, so I know that there are only 10,000 Snarketers in existence. If you’re in the club, you’re part of a dying breed. Our increasingly politically correct culture is stifling warped senses of humor. And thanks to our “everyone gets a gold star” educational system, there are fewer and fewer people who meet the intelligence hurdle. On the other hand, everyone and their mother thinks they’re good at marketing.

The challenge in trying to identify Snarketers is that it’s not visually obvious — it’s not like being tall, or having blond hair. So how do you, dear Snarketer, let the world know that you’re part of this elite and prestigious club?

You buy the book, moron.

And then read it on the train on your way to work, or when you’re on a plane, sitting in first class showing off how many frequent flyer miles you’ve run up because you don’t have a real life.

If you do buy it — and post a review online (I don’t care if it’s a positive or negative review) — then I will give you the next book for free (yes, there will be another book, the subject of which will be Quantipulation).

Here’s my game plan: Real Snarketers who post reviews might convince some Snarketer-wannabes to purchase the book. If you don’t think the “find a sucker” strategy works, just look at how many banks now charge customers a fee to use a debit card. 

Where do you get the book?

If you want the print copy (you show off), go here:

For an eBook version, you can get it from one of two sources: At Lulu.com, or click on the icon below for the Kindle version.

If you buy the book, thank you. If you buy and review the book, double thank you.

UPDATE: If you order from Lulu by October 20, you can get free shipping:

Update #2: Apparently, there’s a formatting problem with the Kindle version. I’ve pulled that “off the shelf” for now (and disabled the link above).

BYOB: BTW, Your Objectives Blow

Mike Mauboussin is an analyst for Legg Mason Capital Management, and a pretty smart guy. I’ve read some of what he’s written over the past few years, and think he’s generally on target with his views. He gave a speech last year (sorry, didn’t see it until @reaburn tweeted a link to it recently) to the CFO Executive Summit titled It’s All About Managing For Value. In his speech, he made the following comment:

A company’s single-valued objective should be maximizing long-term shareholder value.

Mauboussin makes his case for why this should be, and, not surprisingly, makes a strong case. But, in this particular instance, Mike is wrong. Here’s why “long-term shareholder value” doesn’t work as your firm’s single-valued objective:

1. Shareholders are too diverse — or too singular — an audience. Shareholders can be a diverse lot. Some are looking for immediate income and share price growth. Others aren’t necessarily looking for immediate returns, and would prefer to see resources allocated to produce a return over a longer timeframe. Sure, some stocks are categorized as growth or income but stock market categorization is very different than company objective setting. On the other hand, not every company is public. And “shareholders” — in the plural — may be inaccurate. I don’t know too many successful entrepreneurs who became successful by just focusing on their own long-term value.

2. There is no such thing as the “long term.” For a 75 year-old investor, “long-term” is what? Two years? To a 25 year-old, it may be 40 years. We tend to admire companies that make tough decisions that trade short-term gains for longer-term potential, but is taking a hit this year for an expected gain next year really doing something for the “long-term”? The fact of the matter is that the “long-term” is not a timeframe that can be used to make decisions.

3. It doesn’t help make trade-offs. Speaking of decisions, Mauboussin writes: “Running a business requires evaluating, and deciding about, trade-offs. And to properly judge tradeoffs, you have to have a single objective.” Mike is 100% correct. Problem is, “maximizing long-term shareholder value” doesn’t help you make those tradeoffs. Points #1 and #2 help prove him incorrect. If there are shareholders with competing investment objectives, and no clear definition of what the long-term is, then Mauboussin’s single-valued objective is of no help in making critical decisions.

4. It doesn’t inspire and motivate employees. Unless the set of employees equals the set of shareholders, Mauboussin’s objective is bound to produce conflicts. Another reality of modern-day organizational life is that people look for personal fulfillment in their jobs. We want to feel like we make a contribution, both to ouselves, as well as others. Because “shareholders” are an intangible concept for employees of public corporations, maximizing the return to shareholders is not a very motivating objective.

So, if Mauboussin’s objective is wrong, what’s the right objective?

It’s one that aligns employees, customers, and shareholders. It’s an objective that defines what the company will do for customers (and for which customers). Dare I say the right objective is a customer-centric objective? 

The reason why that type of objective works is that it motivates employees, better enables the tough tradeoffs to be made (these decisions will never be easy), and — this is important — lets shareholders decide if this is the kind of company they want to invest in. 

It’s all about cause and effect. 

We make business decisions not to produce long-term shareholder value, but to create and meet market needs — which IN TURN produce shareholder value. Value in varying degrees for the short- and longer-term. 

You can’t effectively manage a complex company if you’re simply trying to maximize long-term shareholder value. And I hope that there’s a large U.S. bank that’s listening. 

Maybe Bank Of America Has A Plan

Maybe — just maybe — Bank of America has a well-thought out plan behind its debit card fees.

Maybe it actually WANTS customers to leave.

Crazy talk, you say? Not sure about that. After all, ING Direct has been lauded for “firing” customers. Bank Technology News wrote this a while back:

“To promote customer homogeneity and keep costs down, ING Direct won’t hesitate to fire customers who demand too much. Better to win over customers with shrewd marketing and good rates wrought by the cost efficiencies of doing business online.”

So, rather than flat out telling unprofitable — or potentially unprofitable — to close out accounts, BofA figures, “hey, we’ll slap a fee on them, and if they don’t like it, they’ll leave. And if they stay, they become more profitable.”

And wouldn’t you know it, but Durbin opens his mouth, and HELPS BofA by telling those customers to “walk with their feet.” Talk about effective word-of-mouth marketing!

So what happens if 1 million customers leave BofA?

If they’re truly the least profitable customers, BofA’s average customer profitability increases. And with less unprofitable customers to serve, the bank can more easily shrink to a more manageable size.

But you know what else happens?

Unprofitable — or potentially unprofitable — go join credit unions or open accounts at community banks. The credit union folks think this is great because it probably means the average age of members goes down. Hooray!

But oddly, the credit union’s profitability is adversely affected. Because if it’s low balance accounts  walking in the door, the income accelerator — the revenue generated on deposits beyond the spread and fees — is diminished. (This by the way, is one of the key reasons why high-yield checking accounts are more profitable than no-interest accounts. See my report on Why High-Yield Checking Accounts Trump Free Checking).

Let’s look at a  scenario: Assume you have 100 customers, equally split across 4 segments. Assume that the average profitability per customer of segment 1 is $1, segment 2 is $2, segment 3 is $3, and segment 4 is $4.

You’re making $250 in profits with average customer profitability at $2.50/customer.

If, thanks to BofA, 25 new Segment 1 customers walk in the door, profits go up to $275, but average profitability declines by 12% to $2.20/customer.

If the four segments represent the generations, it’s possible that you will lose Segment 4 customers (Seniors) over time. So let’s say 25 new Segment 1 customers come in thanks to BofA, but 10 Segment 4 customers are no longer with you. Profitability still goes up, to $255. But average profitability declines to $2.13, a 15% drop.

And if the ratio of customers in the four segments doesn’t change — that is, if segment 1 customers don’t become as profitable as segment 2, 2 as profitable as 3, and 3 as profitable as 4 — over time, then your FI is in trouble.

Oh sure, you can hold hands and sing cumbaya and hope those customers become more profitable over time. But smart firms don’t do that.

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So maybe BofA’s plan is to drive out customers it doesn’t think are — or can be — profitable, and let some other FI deal with them.

I’m sure many credit union marketers are thinking that this is great, that they would love to have those relationships, and grow with them over time.

Maybe they can. But if the BofA rejects….oops, I mean defectors….are the younger, less affluent, Gen Yers, then it may take some time for them to have a material affect on the CU’s profitability.

I’ve heard CU cheerleaders talk about being more open to extending credit to younger and less affluent consumers, and finding ways to help those consumers manage their financial lives without the high rates and fees that the big banks charge.

But there’s a reason why those consumers either don’t get credit or have to pay higher rates and fees to get credit, loans, and accounts. They’re higher credit risks, and they bring less funds to the table, resulting in less profits.

Seems to me there are a number of people in credit union land ignoring those realities.

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But, back to BofA, maybe the imposition of fees on debit cards is a smart move for the bank. I wouldn’t have advised the bank to do what it did, instead, I would have told them to levy fees on writing checks.