The Challenge Dividend

The Real Downside of Expensive Oil

I am just a little ashamed to say that while a great number of news reporters and American citizens are crying loudly about the outrageous price of gas, I'm actually celebrating.  It's not because I'm gloating as one of the ~5% of the population that does not drive an SUV.  Instead, I'm happy because I know that the high price of oil is the one challenge that will finally drive the innovation and improvement that will  free us from costly fossil fuels.  (For previous posts see here, and here)

Unfortunately, there is near term pain.  Of course we're paying more at the pump; but Thomas Friedman in the New York Times recently reminded us that the world's people feel pain when dictators with oil fields tighten their grip.  In 2007, the Freedom House, which tracks democratic trends and elections around the globe reported "the worst year for freedom in the world since the end of the cold war," as 38 countries declined in freedom while only 10 improved.  It also means that our democratically-elected President Bush must bow down to a tyrant to try fail to lower oil prices and help our economy.  Friedman calls it "The Democratic Recession."

"There are 23 countries in the world that derive at least 60% of their exports from oil and gas and not a single one is a real democracy." - Larry Diamond, Stanford

I first read this concept in the book The Paradox of Plenty by Terry Lynn Karl in 1998.  Her research showed a wide variety of historical examples of how too much easy money from natural resources have not only enabled firm control by dictators and monarchs, but also limited the development of vibrant, diverse economies.  The counter-point to the Challenge Dividend comes into play: lack of challenge leads to failure; and its been the case from the Spaniards taking gold from Mexico to Chavez taking Venezuela back in time forty years.

The good news, I believe, is that just as higher prices at the pump mean pain for us now, it is creating a powerful incentive for advancement in energy alternatives.  Ultimately, these dictatorships will fall and we will no longer have reason to station troops in Iraq or cozy up to the Russian kleptocracy.  I just hope it happens in my lifetime.

Moore's Law: Fact or Challenge?

In a 1965 paper, Intel co-founder Gordon Moore suggested that the number of transistors that can be placed on an integrated circuit had been and would continue to double about every two years.  In the more than forty years since "Moore's Law" was born, this exponential advance in transistor improvement has held true.  In reality, Moore's Law is more of a prediction of a constant rate of innovation, rather than a true scientific law.  But could it be more than a prediction, and possibly itself a challenge that is driving improvement?

Larry Page, co-founder of Google, believes that Moore's Law is actually a challenge that is helping driving the dividend of processor advancement.  In a recent interview for Fortune, Page says:

"People think Moore's Law is a description of what happened.  But Moore's Law actually caused people to do the right thing.  Everyone was organized about it - making things better quickly."

In other words, by suggesting that innovation in transistor advancement was a "law," companies and individuals felt confident that they could improve further - and they felt the pressure to be the first to reach the next level (otherwise someone else inevitably would first).

I have to admit, this is a pretty deep thought that I will have to ponder more than the usual time to put together a blog post.  I wonder if there are other ways we can artificially create "laws" that end up driving innovation.  Many people have attempted to set goals - like reaching Mars by 2030 - but we easily shrug these off as hopeful desires rather than inevitabilities.  There are also times when an innovation is near, and competition ensues to be the first to reach it.  For example, in the late 1930s as research on splitting the atom accelerated, scientists and military commanders realized that an atomic bomb was possible.  Thus, a deadly race began to reach this prize first.

I suppose we could look at the current fear of global warming as a "law" that is spurring concern, and innovation.  Most people agree that the Earth is warming due to human impact, and that negative consequences will result.  The law of global warming is gradually driving change.

If I could coin a law it would naturally be The Challenge Dividend - that challenge leads to improvement.  Sounds a lot better than Gilbreath's Law, and besides, there's already Gilbreath's Conjecture.

Service Faceoff: Donatos vs. American Express (UPDATE)

(UPDATE: Donatos just lost me as a customer for life.  Despite the great review below, I had an incredibly disappointing experience today.  After a long Monday, we decided to order pizza for dinner.  After about 45 minutes of waiting we got a call from Donatos.  The store worker said that they no longer deliver to our neighborhood so our order was canceled.  My stunned wife asked why, and he said they can no longer service our street in proper time.  Amazing.  Why not tell us this upfront and allow us to make other plans?  Obviously they discovered the error later - but then why not just deliver the darn pizza and tell us at the door that it was the last one?  Stupid, complete lack of common sense for a service business.

Here's the original post, for what it's worth now...)

It's mandatory for bloggers to periodically use their space to whine about customer service from some big, well-known company.  Today it's my turn.  But true to challenge dividend form, I don't want to just complain about American Express, I want to challenge the company to match the service level of my favorite local pizza chain, Donatos.  Bear with me here...

I've been an American Express member for a long time.  In my previous job at P&G I was mandated to have a company-sponsored Amex and charged well into the tens of thousands of dollars in my six years of business travel while at the firm.  I then got a Delta co-branded American Express card when I took my new job four years ago. 

I have been fairly happy with Amex except for one thing: When I closed my P&G-related account I had a $150 credit.  I don't know why, I think I must have double-paid a charge on at some point along the way.  Anyway, ever since I left American Express sends me a monthly statement telling me that I have this credit.  When I called to get a check, they said that their contract rules that I must go to P&G with a history of proof (like old statements, expense reports and receipts) that I overpaid in order to get approval for a credit.  Naturally I don't have the time or interest in calling my old employer and negotiating for $150.  Yet American Express continues to send the same monthly statement nearly 48 months in a row. 

My wife and I enjoy a small laugh every time the statement comes.  This weekend I suggested that American Express should be able to see that this account has the same name, address, social security number and mother's maiden name as the Delta card that I'm racking up a couple thousand bucks a month on.  I suggested that Amex could have a real-live person call me just once per year and ask, "Hey, Bob, how are we doing?  Anything we can help you with?"  And, of course, I'd mention the P&G card issue - and the real-life person might give me a final credit to my account.  I'd even be happy if they gave the money back to P&G and stopped sending the stupid monthly statement.

But, alas, no such phone call has ever taken place.  Literally a day after our conversation, however, another company did call our home.  I looked at the caller ID and saw "Donatos" name come up, it's a regional chain of pizza joints that we order with about once per month.  Puzzled and intrigued, I answered the phone.  To my shock, a real-life person introduced herself and asked how we enjoyed the pizza that we ordered with them last week.  I shared with her how I liked the new flat-bread pizza, but also mentioned that my wife was a little annoyed that the person who answered the phone couldn't tell us what was on the new pizza.  She looked up the order, saw that "Angie the new girl must not have known about the new items", and she said she would put a $4 credit on our account!

So, American Express, one of the largest financial services companies in the world, which has made a few thousand bucks off of me in the past few years has worse service than the small, but national, chain of pizza joints.  Wow.

Why do you, dear reader, think this is the case?  Personally, I think the local pizza place has more challenge than the faceless American Express.  Donatos has a real-life business franchise owner trying to keep her job, so she makes the effort to use her weekend to follow up on recent orders.  She has a small, manageable customer base.  But to Amex, an individual's satisfaction is truly meaningless - no real challenge begets no real improvement.  Better for American Express to play with big levers like huge TV commercial campaigns and special miles offers with Delta.

What do you think?  It's real easy to contribute, and you can even be anonymous...

Support OxyNation

My buddy and co-worker over at Everyone But You is working a little experiment to pump up the search ratings for OxyNation (a very fun site - I LOLed).  He might have promised to make the term #1 in Google's search rankings in only a week.  Nice challenge, Jonathan, so it fits in this blog.  You've got my support.

OXYNation

Putting a Number on Green Marketing

Thousands of business people around the world are sitting in conference rooms today working on how to leverage consumers' growing interest in the environment in order to sell more products and services.  It's predictable that businesses will exploit any change in consumer buying patters.  It's also predictable that many businesses will exaggerate what they are doing - a practice known as green washing.  Unfortunately, backlash against green washing threatens to kill the entire idea of buying with an eye for sustainability.  What's to be done?

Well, master-marketer Seth Godin suggests a single number that can be used to simply compare the environmental impact of our spending options.  For example, he writes:

Drive to Philadelphia: 150.
Take Amtrak: 22.

Stick with the light bulbs you have throughout your whole house until they burn out: 175.
Replace them all now with something better: 142.

Organic strawberries from California: 88
Frozen strawberries from California: 80
Apple from Dutchess County: 4

The idea of a "core score" is essential in The Challenge Dividend concept.  A core score allows competitors to track their progress, compare each other, and it defines a winner.  Imagine the airlines competing to offer the best sustainability score, a key number alongside price and on-time records.

While it's a great idea, I really don't think this will ever get off the ground.  There are simply too many ways to interpret environmental impact, and too many businesses with trillions of dollars in profit on the line.  If government was impartial, it would be an ideal creator of this concept.  But special interests and political bickering make this a non-starter.

The only way I see this happening is if a group of large companies gets together on its own to create and concur on a system.  An 80-for-20 of industry could establish rules and an auditing process.  And it their number starts running on enough products and services, other businesses will be compelled to join in.  It's a tough challenge, but challenge drives improvement.

No Big Payoff for Payday Loans

Perhaps no legal business is more vilified than the payday loan industry.  Dotted throughout poor and rich neighborhoods alike, these businesses cast a negative reaction as we drive or walk past them.  Whether we use them or not, society generally looks at the payday loan shop as an unnecessary evil. 

If it makes you feel any better, new research shows that despite their rich rates, payday lending is just an average business in terms of annual returns, providing roughly 10% per year in profit on average.  A December 2007 study (via Marginal Revolution) by Paige Skiba at Vanderbilt and Jeremy Tobacman at Oxford found that:

"Despite charging effective annualized rats of many thousand percent, we find lenders' returns differ little from typical financial returns."

I was fairly surprised by these modest profits for payday lenders.  But I was not surprised by the reason: Challenge.  These include:

• Federal, state and local governments have limited their rates and the amount of loans any individual customer may take out per year.
• Most loans are very small, providing an average fee of only $49.
• Big companies like Wells Fargo, Bank of America, and others have entered the market.
• 9% of checks from these borrowers bounce.
• Wages to employees take up 1/3 of revenue.
• Since it is relatively easy and cheap to enter the market, there is significant competition, which leads to lower fees and less traffic.

As regular readers know, I always like to finish my posts with a lesson on how challenge leads to improvement.  But I'm not sure here.  Overall, I believe payday lending IS a necessary evil.  People who are living paycheck-to-paycheck are under unique pressure and sometimes need a quick loan.  There's also the powerful argument that if these stores didn't exist, we'd see a return of the loan shark - who is conveniently free of government regulation, and carries a baseball bat. 

I guess the lesson is that challenge from government and competitors is keeping this industry competitive, and preventing it from charging even higher rates to people who desperately need this service.  So the next time you drive by a payday lender you might feel better that he's facing the same business challenges we do every single day.

Facebook Ads Don't Rock

(If you like this post, come check out my new blog, Marketing With Meaning, where I am trying to literally "write the book" on a new way to do business by creating marketing that people choose to engage with, marketing that itself improves people's lives)

Elvis Presley once sang, “Before you abuse, criticize and accuse…walk a mile in my shoes.” Last week I walked a mile in the shoes of a Facebook advertiser and can now officially criticize Facebook as an option for marketers who seek the Holy Grail of digital marketing. The purpose of this blog is to drive improvement through challenge; and I hope that by challenging the hype I can help improve the future of digital marketing.

Facebook is definitely on a roll. The company was recently valued at $15 billion in an investment by Microsoft, it is gaining traffic, stealing employees from Google, and just took up its revenue forecast and staffing levels.  Forrester claimed the sheer mass of the company's page view inventory would make it a winner, especially with small businesses.

All of this money and attention is a gamble that the millions of daily page views will be populated by paying advertisers. The hope is that, like Google Adwords, Facebook members will pay more attention to ads that are closely linked to their personal interests.  For example, the manager of a punk rock band who is getting ready for a show in Detroit can create an ad targeted to the people near Detroit who say they like punk.  These 40 people (true number) should look at this ad as added value.

In my day job as Chief Marketing Strategist at Bridge Worldwide, my role is to help clients navigate from traditional to digital marketing. That means I have some personal incentive to jump on the bandwagon of anything digital. I am also a frequent Facebook user, so I have some personal interest in seeing the service succeed. But my experience in running a Facebook campaign leaves me unable to recommend the service—and makes me fear that a new bubble might be forming. Let me share my experience.

My Experiment:

Two weeks ago, my company ran a 24-Hour Rock-a-Thon event to benefit the Cincinnati Fine Arts Fund. It was basically an excuse to play Rock Band and Guitar Hero all night long (you can see the entire story here). A few days before the event I decided to invite my network of Facebook friends to either join in person or watch us on a live feed online. After setting up the invitation, Facebook asked if I would like to advertise the event. I clicked “yes” and decided to run a little experiment.

I really enjoyed the Ad Manager interface. I was able to quickly create an ad, play with different targeting audiences, set a budget, and monitor progress. My main goal was to drive traffic to our event via an ad that targeted people over 18 who say they are fans of Guitar Hero. There are a little over 42,000 of these people within the entire Facebook population of 24 million. You can see my ad at the top of this page.

My hypothesis was that this highly-targeted ad would drive a good deal of traffic (clicks). After all, Guitar Hero fans are really into their craft (yes, I am one) and it seemed to me that getting a targeted ad would drive much higher clicks than the industry average of around .1%. I ran three test legs:

• Targeted CPM (to the 42,000 Guitar Hero fans)
• Non-Targeted CPM (to all 24 million-something U.S. Facebook users)
• Non-Targeted CPC (same as above, but pay-per-click)

Results:
You can see for yourself what I encountered after a ten day campaign...

So, with a highly-relevant ad served to a highly-targeted audience, only 12 of the 71,023 ad impressions led to an action. That’s a .02% click-rate.  As an advertiser I was completely under-whelmed. Sure, I only paid $22, but I paid almost $2 per visit. I achieved no scale, no efficiency, and no real results.

But it gets more interesting, my completely non-targeted ad earned 23 visits among 149,081 impressions. That’s the exact same .02%.  Extreme targeting made zero difference. 

What does this mean?

I believe this means Facebook advertising is a failure; and others are beginning to agree.  A few other advertisers are sharing their poor experiences. Take Venture Capitalist, Fred Wilson, and Gawker’s Nick Denton, who also find Facebook ads to be worthless. Both of these guys invest in ad-supported net companies. Throw in Google’s announcement that they have not met expectations in MySpace or YouTube ads. Another buddy of mine in an unnamed Fortune 100 company reported similar click results for a huge, recognized brand.  MySpace is even running a half-off sale to try and move unused ad inventory.

The big moose we need to put on the table is that people have learned to ignore information on the web that is irrelevant to their task at hand. Google Adwords work because people are actively searching, and the ad units sometimes add value. When updating our profiles on Facebook or watching videos on YouTube, we simply have no reason to give ads any attention.  That's why at least one fellow blogger called Facebook "the worst traffic on the net."

Some will say that “clicks are the wrong way to measure internet media” and that studies show people exposed to banner ads buy more product, just like they buy more product when they are exposed to print or television ads. Maybe. But digital marketing and extreme targeting is supposed to offer more than a different way to hit an eyeball.  That's not worthy of a revolution.  Rather, we should expect digital marketing to build deeper engagement and drive action.

I wish more advertisers would come out and share their (poor) results, and more investors/analysts would challenge these valuations. Perhaps user experience legend Jacob Nielsen nailed the issue in Advertising Age in March:

"There’s a huge financial incentive to say advertising works. To say that it doesn’t work—I don’t get anything out of that."

I believe we digital believers do have a huge incentive to not waste dollars either as advertisers or investors. If we fail to closely analyze digital alternatives we might blow ourselves another bubble and hype ourselves back to the unemployment line.

Instead, we need to challenge the impression-based advertising model and create marketing that consumers actually want to engage with. Now that’s a marketing model worth the hype, and certainly an improvement for both marketers and their consumers.

(UPDATE: George Colony at Forrester has some great counterpoints to the belief that advertising will continue to drive business models.  Jon Fine at BusinessWeek reports more on how making money on YouTube will take longer than expected.  And Chris Anderson at The Long Tail reports that broad interest targeting is working better on focused networks through Ning.)

(MORE UPDATES: Paul Soldera takes my challenge to do better and while he improves his click rate, he agrees that Facebook is in trouble.  AND in this week's Advertising Age my new company-related blog, Marketing with Meaning was featured and included a piece on this Facebook experiment.  Neat stuff.)

(If you like this post, come check out my new blog, Marketing With Meaning, where I am trying to literally "write the book" on a new way to do business by creating marketing that people choose to engage with, marketing that itself improves people's lives)

AMD Marketing Competition

I don't usually click on banner ads, but last week I saw something intriguing in my Bloglines feed list, an ad directing me to see a video titled "Competition Matters" by AMD.  Since this blog is in the business of promoting competition and a driver of improvement, I took the plunge and clicked away.

It seems that AMD has set up a mini-site in which its CEO, Hector Ruiz, speaks about how competition drives improvement in the technology marketplace.  In this three minute segment, Ruiz speaks about how the telephone business saw little innovation until the government declared it an illegal monopoly and broke it up.  Where innovation used to look like a phone in a color other than black, now we have an extremely vibrant market that surprises us daily with new features, functions, and lower prices.

From just viewing the video I was not sure what Ruiz was driving at on behalf of AMD.  He is obviously the head of the challenger brand in the market, battling against industry leader, Intel.  He made mention of the need to encourage free markets in the future.  There was no specific action step or cause to champion.  Digging a bit deeper into the links, however, I found a another site that listed recent news in Europe, Korea and the State of New York in which Intel is being accused of anti-trust actions.  And I found a pdf of a legal challenge of Intel by AMD.  Net, this video is a part of AMD's effort to stoke the fire and win the PR war.

I will have to spend some more time researching this case before I pass my own verdict, but I like AMD's argument.  Open competition without unfair advantages is the market system that drives innovation in technology and every other market I have studied.  I also like that AMD is not just taking its message to the courtroom, but working to educate the broader consumer basis that challenge leads to improvement. 

Nowhere to Park Complaints

In our world of increasing competition and improvement, examples of monopoly power and lack of improvement really stand out.  Take my monthly parking lot...please.

I pay $60 per month to the Central Parking Corporation in Cincinnati, Ohio, a division of Allright Parking, for the right to park my car next to my office.  I have done so for nearly four years.  At least once per month for those four years, my parking pass has failed to trigger the gate to open.  When this happens, I am forced to back my car out into fast-moving traffic and pedestrians, and make my way down the road to another entrance a few hundred yards away.  Often people like me will get out of their cars and drag a sign in front of the gate to help fellow parkers know that it is "down" again.  This is extremely frustrating, fairly dangerous, and a horrible customer experience.  Usually I suck it up and walk into work in a worse mood.

A few days ago I was walking to my car for the ride home after work and noticed a bright red paper on my windshield.  It was a note from the Central Parking Corporation advising me that their rates for monthly parking would be increasing by $5 per month.  No reason was given for this 10% price increase, and since Central Parking and Hamilton County (which owns the land) collude to control all of the parking in the area I can assume it is simply a grab for more dollars by a monopoly power.

Then I drove to work two days later and got the dreaded gate malfunction again.  But this time I decided to act.  I grabbed my price increase letter and called to complain.  The woman who took my complaint was very nice.  She said, "Yeah, someone just called to say the same thing....it happens all the time when it rains."  Of course she offered no apology, promise of fixing it, or a discount for next month's fee. 

Now I know that Central Parking Corporation often gets calls from frustrated customers, and it knows that its equipment malfunctions when it rains.  So, after at least four years of this, why doesn't the company invest in a system that performs in the rain?  Or why not put some kind of small canopy over the sensitive signal box to protect it from rain?  Wouldn't that extra $5 times hundreds of spots pay for this minor investment that causes major dissatisfaction?

Of course not.  There is absolutely ZERO incentive for Central Parking to improve its service.  Its customers have no market choice.  Lack of challenge means a lack of improvement. 

I'm not 100% sure what the answer is.  I could see us parkers getting together to file a class action lawsuit against Central Parking, maybe asking for a refund for our hassle during these rainy days that screw up their system.  My preferred idea is that Hamilton County, a government organization that represents its citizens, should do more than just take a cut of Central Parking's dollars; rather, it should spend a few hours a year surveying the customers, and fine Central Parking if it fails to meet these very basic customer service issues.

I won't be holding my breath, though. 

Less Challenge in the Alps

From time to time I get a chance to share personal stories of challenge dividend dynamics, rather than simply commenting on a article or news item.  This week I will actually share two personal stories.

I spent last week at a company conference in Chamonix, France, a small ski town/resort in the Alps about an hour drive outside of Geneva.  My expectations for the resort were fairly high going in.  "The French Alps" sounds romantic to start with, and a few friends told me that this was well-known as a ski paradise - "The Aspen of the Alps."  I had not skied since junior high school in the mountains of North Carolina, so I opted out of skiing, but I was looking forward to the sights and sounds that a premium resort should hold.

Interestingly, I was fairly unimpressed by my visit.  Of course the scenery was beautiful and the French village cute, however our 3-star resort hotel was, frankly, a dump.  It featured tiny beds, poor food, threadbare towels, and decor that looked unchanged in a decade or more.  I am far from a travel snob, but after spending hundreds of nights in hotels around the world I was surprised at how crappy this was - especially as a premium tourist destination.

I compared this trip to another conference at Sun Valley, Idaho, about two years ago and a trip to Copper Mountain, Colorado when I was a kid.  Both were much nicer.  They lacked the French history and architecture, but had many more amenities.  They were updated and at least on-par with $200/night hotels that one finds in large U.S. cities.

So, why is Chamonix seemingly lacking?  My guess is (you guessed it) that the French Alps simply lack the competition that occurs in North American ski resorts.  Skiing in Europe is limited to a few towns and resorts in the crowded Alps, while in North America, there is a vast swath of ski options throughout the chain of the much longer Rocky Mountains.  In North America, there is more open land and open competition.  New resorts spring up often, forcing the existing ones to keep pace.  In the Alps, however, it just seemed as if there was little change and few new players.  As a result, the market slows down, competitors stabilize, and the quality begins to decay.  Lack of challenge means a lack of improvement.

Of course I cannot speak to the actual ski conditions.  Some tell me that maybe favorable tax laws encourage more improvement in the U.S..  And maybe my hotel was the exception.  I would love to get others' perspectives.  Let me know your experience...