Outsourcing Your Future – part 2

theatre seating

There are a number of company-hosted competitions, events, hackathons all with the aim of introducing innovation to the host company. I questioned the rationale behind these initiatives in the first part of Outsourcing Your Future.

The P&G Signal Accelerator Innovation Brief for Daycare Subscription is a good example of how these can be presented to the public, encouraging submissions from other companies. It opens the door for innovation with the potential reward of access its brands for the external company.

Whereas I questioned the motivation behind the initiative in the previous post, I want to look at other aspects in this post.

Maturity of the host

When I talk about maturity, I’m usually thinking of the difference between experience and wisdom. Someone can have a great number of experiences, but they may not be wise from what they’ve experienced. Similarly, an organisation that is mature in age is not necessarily mature in its capabilities.

By hosting innovation events, older companies are trying to introduce the capability of innovation into their organisation. It’s a parallel move to that which we saw in call-centres, then contact centres and also in shared services solutions. The company focusses on its core and outsources some standardised capabilities of its business.

In principle, that seems fair, since innovating is just one of many capabilities (we could give it a better name, but it’s still innovation). The bigger issue is that the target of these innovation events is often the core business; something which very few chief executives would ever dream of outsourcing. However in hosting innovation events, that’s what they’re doing; they’re outsourcing the company’s future.

Direction

Having read through a number of calls-for-applications and similar invites, plus being familiar with a larger number of events, I see two directions forming.

  1. Rather than the innovation happening on the inside and pushing it’s way out, the innovation is nurtured on the outside and is adopted internally. Or more often, it meets the resistance of the host organisation and fizzles.
  2. Innovation happens on the outside and is then partnered, e.g. you keep the external startup as an external and then purchase services from it (which may be viewed as allowing it access to your procurement team, but it’s still money transferring for services). That partnership arrangement keeps the innovation skills on the outside, but allows you the benefit of the innovation for a cost.

Managing risk

Considering the age of many companies hosting these events, they will have rigid governance procedures. Startups, on the other hand, do not. They are more flexible, more able to change direction and quicker to deliver. By allowing other companies into your problem space, you take advantage of their ability to take shortcuts that wouldn’t be allowed in your organisation. Those short-cuts may not be short-cuts in reality, it could well be that your organisation has created obstacles that do not need to be there. However, the result is that the external startup can deliver more quickly than your internal teams. That speed of delivery has value in terms of being able to conduct business experiments and learn from the experiments more quickly.

But as well as being able to make short-cuts, startups can take riskier approaches, which is easy to see when one of the guiding mantras of the startup ecosystem is “Do things that don’t scale” originally from Paul Graham.

By hosting innovation events, you’re outsourcing some of your risk management. You allow yourself to focus on the product, not how the product was developed. That doesn’t free you from all responsibility, but it does allow a shift in responsibility at significant points in the development process.

Debt

There’s been a growing trend of recognising the concept of technical debt. In the same way that shortcuts or short-term decisions for technology have to be paid back later, there are other forms of debt. I’ve discussed process debt before.

Innovation events, especially sprints have an element of creating debt. It’s not necessarily bad debt, since the act of bringing people together to progress a common goal has significant value, but the team involved may decide to do something quickly because of the time available. Even if the decision is “I’ll do it in this tool to get it ready by Thursday evening and, if the concept is accepted, then we’ll do it properly next week.” – that’s still debt. And we’ll see those decisions across process, technology, management structure, job descriptions, skills, stakeholder management, customer engagement, etc.

At the point that you want to bring the innovation in-house, you will have to pay that debt, so where have you found yourself? Did hosting the innovation event outweigh the debt incurred? Sometimes yes, sometimes no.

Value

And that brings me to my last point. I’m struggling to think of – actually, I can’t think of – a single company that has ran an innovation event and then openly discussed those innovations a year later. There are companies that regularly host innovation events and there are those that are starting out in 2018 for the first time. Of those that have hosted previously, none publish what’s happened since. Some do not refer to previous events. A few publish what happened soon after the event, but do not follow-up with current news, reflecting on the value realised through hosting the event.

I can think of one company that has benefited from an innovation event from a cultural perspective; being able to expose its wider workforce to innovation through immersing them in a week-long festival. Even in that case, one which they openly refer to previous innovations, I do not know which of the innovations are currently active one year later.

For instance, I’d be interested to see previous entrants to the event, how they were engaged following the event and what progress has been made up to now.

I can think of one brand-led accelerator, Collider, that does publish details about previous cohorts.

Overall, it looks like the pickings are slim when trying to evaluate the performance and value of outsourcing innovation through hosting an innovation event.

Outsourcing your future

Innovation

There’s a growing trend in organisations to outsource their future through innovation labs and innovation competitions.

I like to question the rationale behind these decisions and look at the host company more closely. After all, what is behind its decision to handle innovation from outside-in, rather than inside-out?

Reasons

Innovation Ideas
Innovation Ideas

So let’s explore. Why would an organisation decide to innovate from outside?

  1. Because directors/senior management do not believe the company holds the skills for innovation within itself
  2. Because it doesn’t actually hold the skills for innovation within itself
  3. Because it doesn’t have a culture that nurtures innovation
  4. Because it doesn’t have a financial model that permits innovation
  5. Because it wants to perform innovation theatre

Let’s look at each of those in turn and see if the innovation competition is the best approach

1. Because directors/senior management do not believe the company holds the skills for innovation within itself

This is an issue of perception and/or distance. Perception in that the skills exist but are not exposed in a way that directors know that the skills are there. Maybe those skills are hidden performing other tasks. Distance in that the directors are too remote from the sources of innovation in the company. In this case, outsourcing innovation is likely to be met with resistance internally, by those who have ideas, have an appropriate approach and behaviour but are not recognised.

2. Because it doesn’t hold the skills for innovation within itself

In this scenario, the host is attempting to outsource the provision of innovation skills. However it’s only sourcing them for the life of the innovation programme, typically an accelerator. It may have a desire to borrow innovation skills from the startups it works with, however the issues are often more fundamental than that. Leading to requiring a change in culture rather than just skills. And a change in culture may require fresh blood.

3. Because it doesn’t have a culture that nurtures innovation

By mixing its own employees with that of startups, the host organisation hopes to have some of the culture rub off on its own employees. This culture-transference is fine in principle, but only works for those that are directly engaged. The effect dissipates quickly as those that were engaged then re-encounter the culture of the host organisation, especially if that host organisation has severe governance procedures.

4. Because it doesn’t have a financial model that permits innovation

Spending money on an innovation programme is a known cost within standard parameters. The host organisation can commission the accelerator or competition under its in-house business rule policies. Whereas if the same business case authors had presented individual and separate innovations to the same approval board, they may have been rejected due to the differences between innovation accounting and more traditional financial accounting.

5. Because it wants to perform innovation theatre

I’d like to think that innovation theatre is a product of accident. In that I’d hope that no organisation sets out with the express wish, whether in terms of vision or other goal, of performing innovation theatre.

Assuming it occurs by accident, we find examples of idea generation, possibly in terms of a internal staff panel competition (think Dragon’s Den/Shark Tank), running a 12 week incubator, hosting a hackathon. How many of those innovation events result in real, lasting change of the same magnitude as predicted during the innovation session? Or do they fizzle when they encounter the host organisation?

Next

I’ve addressed this from a few different angle in a following article.

Rain versus Innovation

rain

The following tweet made me consider, initially thinking about the place of Manchester in innovation, but also the wider concept of personal transport versus climate.

It rains in Manchester. From personal experience, Manchester doesn’t feel the rainiest place in the United Kingdom, but it does have a reputation for significant rainfall. That doesn’t dampen the city’s spirits. We just do things differently (that’ the obligatory Tony Wilson reference done)

The type of personal transportation afforded by a bicycle, whether electric or not, isn’t ideal in a climate that features rain heavily on its calendar. The cyclist has to wear weatherproofs, need a change of clothes in the office, probably a shower, and then the reverse on the way home. Or they could just get wet.

That doesn’t prevent cycling in Manchester; it just makes us think more about our journeys. We can’t be as relaxed in planning them.

That creates inertia to change. Which prompted me to think about climates where single person vehicle commuting could be more suitable. Regardless of Britain’s position in the world ranking of innovation, does that mean that Britain will get overtaken by other countries with more suitable climates?

Britain’s transport infrastructure always feels more intensive compared to any other country I’ve travelled to. I’ve seen the quizzical expressions when explaining to US colleagues that we may have to set aside a day to travel 250 miles in the UK (it doesn’t always but it massively depends on which 250 miles you want to travel). But I’ve yet to experience Japan or similarly densely populated countries. With innovation being driven by warmer climates, especially in terms of Silicon Valley, or countries with larger infrastructure (e.g. China, Germany and again, the United States), you can imagine solutions being solved for those countries and climates, not the UK’s. To be clear, it’s no-one but the UK’s and EU’s role to alleviate transport issues in the UK, let innovation solve the problems of each country. Some will be applicable beyond the geographical boundaries in which they were developed, some won’t be. Which then creates an inequality. It’s not the inequality created by resources or the centralisation of power or empire. Instead, it’s an inequality created by provenance of ideas in relation to the location.

Which reminds me, I wonder how the doors on Tesla’s model X fare in Manchester. Our rain is usually accompanied by wind so it blows sideways, not falls down.

Patents, MVA or GDP: None of them indicate innovation

Innovation?

In “When is it innovation?“, I introduced the idea of a sector’s familiarity with an concept. I’ve just read Bloomberg’s Innovation Index and I find a few of the variables used to be old-school to say the least. It made me wonder what the index should actually include to be relevant to innovation.

 Issue 1: Patents

The first item I noticed was the grading of countries based on the number of patents. I think of patents as being the enemy of innovation, especially when we consider the role of patent trolls in the marketplace. If someone can create an idea, patent it, but have no intention of delivering it. But only holds onto it in order to prevent the person who does actually figure out how to build it, isn’t that stifling innovation?

To some extent, I’m just shouting against a wall. The establishment and market of patents exists and I do not possess the influence to change it. I’m ok with that. However, considering the position of patents, why are they in the Innovation Index? Wouldn’t a better figure be, the ratio of patents created in that country against the number of patented, implemented products? That at least would account for ideas that have been translated into reality.

Issue 2: Non-innovation Metrics

There are several metrics in the table that do not fit with innovation, at least in any definition I’m aware of, and definitely not in the definition I’d proposed in “When is it innovation?“.

For instance, Manufacturing-Value Add is a good metric for assessing the transformation of materials in higher value, e.g. taking a raw material and refining it, taking sheet metal and producing a finished product, etc. But that’s not innovation. That’s just doing your job. It’s business as usual. You could innovate in that area, e.g. a novel way of refining, etc. But that metric doesn’t measure that.

Also, the Productivity metric based on GDP and GNI exhibits similar issues. It’s a measure of how much money is generated relative to the population. That isn’t innovation. True, a high productivity score could be attributed to high levels of innovation (in terms of increasing the output of each person), but not necessarily.

 

xTech – Part 1 – Why I’m fed up with tech

server

xtech for Sector x

  • Fintech is challenging the Finance sector
  • Insurtech is challenging the Insurance sector
  • Healthtech is challenging the Health sector
  • Will we see Techtech challenging the Tech sector?

And since new technology is developed every month and every year, would we be looking at a Techtechtech sector in a decade?

It’s seems ludicrous to think of it that way and it is indeed ludicrous. The reason it sounds so odd to have a Techtech sector is that we’re allowing ourselves to be focussed on the technology that’s enabling us to replace the older business models.

Analysis

If you get a nice interface to your banking account and that bank account has a different charging model to the older high street banks, does that make it fintech? According to the hyped world, then yes. But it’s stilll banking. It’s still finance. In reality, the newer entrants are just doing what the incumbents should have been investing in more heavily a few years ago.

In some cases, newer entrants who are smaller are working out how to make a profit without the expectations of having to pay the large salaries of traditional banking, without having to pay large, multiyear leases for high street premises, etc. The main lever they’re using is initially technology, but sometimes it’s other elements of the business model that are being altered. That’s a critical point to realise; it’s not always the technology that is being used as a lever for change.

Customer Channels

Let’s take the example of First Direct, the HSBC bank that had no high street branches and regularly received excellent customer satisfactions scores compared to its high-street cousins. Mint, Smile and Egg all followed with variants of similar business models. They had changed one element of the business model. They had focussed on the channel of interaction, forcing a channel shift from face-to-face to telephone (at the time) and online (later when the technology caught up). Everything else (apart from perhaps some of the branding/marketing) was the same as the high-street.

Business Models

What we’re seeing now is other entrants prepared to look at other components of the business model, such as where the revenue is generated (e.g. subscription versus visible transaction vs bundled transaction cost vs bundled products and so on).

Here’s a simple concept: Take the Business Model Canvas and apply SCAMPER to each section. It’s that easy to generate new ideas and that’s what seems to be happening in every sector.

But this isn’t really fintech. Yes, tech is opening up opportunities and provides the ability to change different elements of the business model that would have been more awkward or at least not cost-effective to change before. But, again, it’s still banking. So let’s just call it finance. The big question for incumbent banks is, rather than relying on their current business working in the future, they’ll have to accept that different models will emerge. And it’s their choice if they want to be delivering those models, enabling others to deliver them on their behalf, or simply be swept away as their market share is eroded by competitors.

Conclusion

Let’s get this straight. I’m not against the concept of Fintech. I’m against the fact that the concept exists separate to the Finance sector (or rather a subset of it). I believe that every sector has a duty to innovate, improve and invent. For sector x, we don’t need xtech.

  • There’s an additional angle to this which I’ll cover in the next article.

Charging Admission as an Example of Changing Strategy

ticket

We should all look at the thinking behind this article in Business Of Fashion; there’s a lot we can take away from it. It shows a level of innovation and shines light on so many values that we take for granted.

ticket sign
ticket sign

 

The Premise

The author writes about the shift of a fashion store to charging customers a fee to enter the store.

The argument is that the store is an entertainment experience and that we expect to pay for other places of entertainment, e.g. theatres, cinemas, etc, so shouldn’t we also expect to pay to go to fashion stores?

So instead, we could charge admission not for the store but for the experience which happens to be in a store. There’s a distinction there in that most stores will not have an experience worth charging. Indeed, as the author mentions “If you never contemplate charging admission, chances are you will never create an experience worth an admission fee”. Turn that around and ask yourself, what is it about the experience that you offer customers that is worth charging for? Not the product, but the experience?

Conditions for use

Charging an admission fee only seems to work under a few conditions;

  1. When the admission fee is parallel to what would be paid for the product itself. Think of any pay-per-play/pay-per-use experience, they have to be close in price to the purchase of the product.
  2. When there are other factors at play (such as scarcity) which enable the promoter to restrict the entrance to those who pay to attend

Principles

The example in the article is interesting in that the experience itself is created to be scarce. That is on top of any scarcity of the products involved.  By creating a scarcer resource, we are influencing by way of Cialdini’s Scarcity Principle. In that way, we are creating an environment in which the customers is more likely to rely on the shortcut of knowing “it’s scarce” and hence more likely to buy.

The admission fee is also a conversion filter, in that it will weed out those people who are just browsing at products outside of the range that can afford (which brings to mind the window shoppers outside the Rolls-Royce showroom in Mayfair).

ticket
ticket

By charging an admission fee, we also see the use of another Cialdini’s Principles; Consistency. The customer has already purchased the right of admission, so they’re more likely to commit to purchasing a product from the store.

The exit

I love the process that the author, B. Joseph Pine II,  and the stores he writes about have gone through to get to the solution they’ve arrived at.

Imagine following-up the last question in the article “what would you do differently if you charged admission?” with a further more design-oriented question: “how may we create a purchase experience worth paying for?”

The Kano model can operate in reverse: exploring the travel industry

You may have come across the Kano model before. It’s an analytical technique for understanding what your customers want and, importantly, what they’ve come to expect as required.

Exploration

I was travelling on a local train last week with a largely empty carriage. I had the choice of seats. I am familiar enough with these carriages to know that there are heating vents in blocks underneath every third row of seats, so I didn’t sit behind one of them. That way my feet would have somewhere to fit.

So I a seat two rows behind.

Then I noticed that my knees didn’t fit. Actually, couldn’t fit. I was seated as far back in the seat as I could go and still my legs could not fit straight in front of me. I had to resort to man-spreading (the shame of it!), not because I wanted to but because simple, basic geometry meant that I wasn’t going to fit in that seat any other way.

Since the carriage was empty, I looked around at the other seats to see if I’d chosen a particular tight space. Unfortunately they were all that size.

I’m pretty average in height, my legs aren’t especially long, so I pity those at 6’5″ who have no chance.

What the train operators have done is increased the number of seats by reducing the space allocated to each seat. This isn’t a new problem, nor is it a new solution. Airlines are famous for reducing the space available to travellers. But it is interesting to many customers transport operators are willing to put on the uncomfortable side of the line. Is it 5%, 10%, 50%?

Now let’s look at the travel experience through the lens afforded to us by the Kano model.

Application of the Kano model

The Kano model depends on asking customers what features they would be happy to have and which features they would be unhappy not to have. You ask the same question for each feature (but separating out the questions). The point being that customers can say they really want something, but wouldn’t complain if it’s not present. Or the converse, where the feature is just expected as part of the product.

Kano Model - Wikipedia
Kano Model – Wikipedia https://en.wikipedia.org/wiki/Kano_model

Even to the point that they haven’t considered not having the feature. Imagine doors that open automatically in hotels. That could be classed as a delighter in that it makes a difference to the customer’s perception of the product. These are at the top of the chart above the red line. But if you ask if a door is required, then it’s likely to be considered a basic, in that it’s required and expected. These are at the bottom of the chart below the green line.

There is also a performance need running from bottom-left to top-right, in that the better you deliver these features, the happier the customer.

Usually the focus is on delighters becoming basics over time as technology makes it cheaper to deliver those features.

Entertainment on airplanes used to be a delighter. Then it became more standard and has been a basic requirement for a number of years now. We’re seeing a similar transition with wi-fi becoming a basic requirement throughout all stages of travel, whether in taxi, at the airport, on the plane, etc.

The reverse path

However the travel industry also seems to be offering a reverse path of taking features once regarded as basic and turning them into delighter. Unfortunately this path exhibits some discomfort as the basics are provided more cost-effectively each year, until the trend for them reverses.

Let’s consider the local train journey. At some point in the recent past:

  • Being able to sit down in comfort was a Performance Need (the more comfort, the better)
  • Being able to sit down, without someone else’s bag or umbrella in your face, was a Basic Need
  • Being able to travel from A-B on the train was a Basic Need
  • Being able to travel from A-B on the train on time was a Performance Need
  • Being able to travel from A-B on the train without having to change trains was a Performance Need
  • Having access to toilets on the train was a Performance Need
  • Having access to wi-fi was a Delighter
Kano model for train travel a few years ago
Kano model for train travel a few years ago

Yet, the service that I was provided gave me the impression that

  • Being able to travel from A-B on the train is a Basic Need (no change to this)
  • Being able to travel from A-B on the train on time is a Performance Need (no change to this)
  • Being able to travel from A-B on the train without having to change trains is a Performance Need (no change to this)
  • Being able to sit down, without someone else’s bag or umbrella in your face has become a Delighter (this has changed)
  • Being able to sit down in comfort has become a Delighter (this has changed)
  • Having access to toilets on the train is still a Performance Need
  • Having access to wi-fi is a Performance Need, becoming a Delighter
Kano model for train travel now
Kano model for train travel now

So at some point in the past, being able to sit down in moderate comfort was a basic requirement. This is where it gets interesting, in the eyes of most customers, that requirement still is a basic need. But we’re seeing a disconnect between the customer perspective and the train operator perspective. And that disconnect is increasing with more cohorts or segments of customers as the space per seat is reducing (i.e. more tall people are being made uncomfortable).

Future

We may see a reverse-reverse change, where comfort becomes a delighter yet again. And following that further on, we could see a pendulum effect as features:

  1. initially start out as Delighters, probably aligned with the Early Adopters
  2. become Basic Needs as the technology and environment to produce them becomes cheaper and more prevalent
  3. then become further down the basic needs as companies ratchet down costs by focussing on the bare minimum of Basic Needs
  4. then swing back to being Delighters as new entrants to the market focus on these features as differentiators
  5. then swing back to Basic Needs as the incumbents either adopt a better quality of Basic Need to combat the new entrants or the new entrants become the new incumbents and start the cycle of focussing on cost and delivering the bare minimum for Basic Needs
A Pendulum effect in the Kano model
A Pendulum effect in the Kano model

4 box model for deciding on the future – part 2

Revised Revenue Vs Confidence 4 box model

I finished the previous part of this article with a four box model that had two quadrants with the same outcome.

Revenue Vs Confidence 4 box model
Revenue Vs Confidence 4 box model

With that article, I’d stated that the outcome you may want to choose would probably depend on the lifestyle you want to lead.

That still applies, but I want to show what I do with similar four-box models

The issue

I don’t like when four-box models show opposite quadrants with the same outcome. The reason is that the quadrants are an approximation so we’ve blurred what we do with data points that fall around the centre (like around a bullseye) of the model. Imagine a point of x=49 and y=51, why should that be treated different to x=51 and y=51? or x=49 and y=49?

How to interpret

What we recognise is that if the diagonally-opposite quadrants are more a diagonal stripe. Depending on how we want to approach the corners, this could be a straight swipe or arcs. I tend to find arcs better reflect the decisions being made.

Revised Revenue Vs Confidence 4 box model
Revised Revenue Vs Confidence 4 box model

 

4 box model for deciding on the future – part 1

RevenueVsConfidence

I regular make decisions about where I’m going to spend most of my working effort.

A few years ago, I was sharing my ideas and potential options with a few friends and ex-colleagues. I used an extension to the typical four-box models. This simplified the thinking and forced me to recognise a few major questions that I’d been skirting around.

I wasn’t short of ideas for businesses; some proven, some not. But I recognised I didn’t have enough time to do everything, nor enough available funding to pay others to do everything. Importantly, I didn’t have sufficient time or energy to chase funding to make all the ideas happen (and chasing too many would disqualify the ideas from most potential funders).

Horizontal axis – annual revenue forecast

I didn’t initially approach this in a mercenary way, but after trying a few variables, I found that using predicted revenue as the horizontal axis opened up a number of questions. While I wasn’t focussed on the money, it did make me evaluate how much effort I’d want to put into a venture in order to gain that revenue.

Vertical Axis – Confidence

For the vertical axis, I plotted my confidence in being able to achieve the revenue I’d stated. For the 3 or 4 revenue targets per business idea, I also evaluated my confidence in that target. Obviously, something being earned in the current year is 100%. And most ramped down towards the right as I my confidence decreased, the higher the revenue. The difference is that some business ideas had a steeper slope than others.

Analysis

RevenueVsConfidence
Revenue Vs Confidence

I picked the most likely ideas I had at the time and plotted them on the chart. It was obvious that there were some with a good chance of high, recurring revenue, but that they bored me senseless. And unfortunately, the one I was most interested in, had a significant dependency on me and had no way of recruiting others to make it work. I chose to progress with one that interested me and had a decent chance of high revenue, with my consultancy as a backup.

Other variables

Since it was important to me to realise what was important to me, I had planned to use “passion” or “interest” for the vertical axis. However, when I did this, it was quickly evident to me how I felt about the idea in question. I didn’t need to have that value on a graph; I could feel it when I discussed the ideas.

For the horizontal access, I also considered:

  1. effort required to achieve that revenue
  2. familiarity with the domain in question

I also considered using the inverse of the effort required as a variable for the size of the data point, with easier ideas being bigger than more difficult ideas.

Further analysis

You’ll notice that in the Excel chart, I’ve also put the dividing lines for half of the max revenue and at 50% confidence so that we can start to see a four box model.

That leaves us with the first interpretation.

Revenue Vs Confidence 4 box model
Revenue Vs Confidence 4 box model

The bottom left of low-confidence and low-revenue is easy to understand. It’s not the area to concentrate on.

The top right of high-confidence and high-revenue looks like the holy grail, but these usually require intense effort and significant funding and resources.

That leaves the top-left and bottom-right of high confidence, low revenue and low confidence and high revenue. The choice here is more on of lifestyle. What type of lifestyle are you after? Then choose the most appropriate box. This is where effort may have been a more useful axis than confidence.

Read Part 2 here.

Further innovations in the musical instrument industry

guitar
guitar
guitar

In a previous article, I wrote about TC Electronic and what we can see from the outside regarding their innovation process. Today, I’m introducing Fender’s approach to reducing churn.

 

Fender Musical Instruments have released a new training service called Fender Play, which has a different aim to the current Riffstation.

The central idea behind Fender Play is to keep guitarists motivated to learn, by providing shorter lessons based around their favourite songs.

Fast Company have a good introduction to the service, so I won’t repeat what they’ve already written. Instead, I want to highlight a few features that are of significance from a corporate innovation perspective.

Attrition rate

Two phrases from Andy Mooney, CEO of Fender Musical Instruments Corporation really struck home:

  1. “About 45% of the guitars that we sell every year are bought by an absolute beginner”
  2. “Somebody who has never touched the instrument before, 90% of those players abandon it within one year”

Taking the 90% that abandon within one year, that means of the people that start in any one year, of those that are going to give up, only 10% make it through to another year. Fortunately that cohort is complemented by those that have already not give up from previous years.

So at least 40.5% of customers will not return to buy again (90% x 45%). That’s a massive attrition rate. For any business. That also doesn’t include experienced guitarist who switch to another brand or give up at a later date.

So the focus has traditionally been on the longer-term guitarists, those of the 10% that continue beyond the first year. Now let’s look at the effect of that change and the rationale behind the new service.

Repeat purchases

The first guitar sold is usually a cheaper guitar, let’s say a Squier Affinity, possibly in a starter pack so costing between £150 and £250 depending on the pack. A few routes are then available:

  1. If the guitarist quits, then that guitar will stay in a closet, under the bed, in a corner or be sold on as used (which then reduces the number being bought new). That customer will not be a customer again unless circumstances change – and they do – I know a number of people who have given up and then start again, usually picking up a better guitar to learn on due to more leisure income.
  2. The guitarist learns slowly. Then they may stick with this guitar for a few years or it may be the onyl guitar they ever purchase, since their talent doesn’t outgrow the guitar.
  3. The guitarist learns at a quicker pace and then realises they would benefit from a better guitar.

An intermediate guitar such as Fender Standard Stratocaster is £500 upwards. This is where most people who call themselves guitarists stop. These are perfectly giggable guitars and it’s at this stage where the talent of the guitarist makes more of a difference than the guitar itself. However there are still returns to be had by upgrading, even those are diminishing returns.

A more advanced guitar would be Fender USA Strat , starting at £900+, commonly £1500-£2000. These are the guitars that you’d expect a pro guitarist to be playing on stage or in a recording session.

Orders of magnitude

In a lot of organisations, the concept of a regular purchase is based on the repeating purchase being the same product or service over time, potentially with some minor upgrade. So you just multiply the value of the original purchase by the number of repeat purchases and you have your lifetime value of the customer.

Guitars are more similar to cars in that customers are likely to upgrade at the repeat purchase, until they plateau. The difference between cars and guitars is that the price difference in the Fender range is 10X between the initial beginner customer and the experienced guitarist. If we start to discuss the Customer Shop offerings, then we can be into a 20X or 30X price difference.

So the dynamics of keeping someone playing for longer and progressing to the next level becomes incredibly important

The aligned cross-sell

Guitarists need additional equipment to be able to make the sound. An electric guitarist requires an amplifier, cable, strap, picks, tuner as a basic package. For every price point of the guitar, there’s an amplifier at a similar price.

This again reinforces the interest in keeping a customer playing for longer and progressing to the next level sooner.