Archive for category Economics
The value that banks deliver to customers is changing – that is one of the currents that runs through Joseph DiVanna’s excellent Redefining Financial Services. I’ve been reading this book (and a few others of DiVanna’s) to better understand where my own company, Zafin Labs, fits into the value proposition of banking services in general. We make pricing and billing solutions for banks, and at least when I joined, I struggled to figure out what that meant exactly. On the face of it, it was quite simple – banks apparently required solutions for pricing and billing problems, and we apparently made those. The fact that I do not come from a banking background of course put me at a disadvantage – yes, I had studied finance and to a lesser extent, banking, during the MBA, but I found it difficult to understand how these enormous organizations could not solve their own pricing and billing problems. That all changed once I read DiVanna’s book.
The brilliant thing that DiVanna does in Redefining Financial Services, is to put the problem into context, specifically a historical context. I had never considered why banks existed in the first place – this somewhat obvious question, despite having a history degree and having studied the medieval period when banking was born, had never dawned on me. If you asked me before I read this book why banks exist today I probably would have said ‘so people have a safe place to store money (ie. surplus)’, and while on the surface that is true, there is much more to the historical context than that.
For example I had never considered the obvious implication that someone living in 1250 AD did not at one point say ‘hey, we should have a bank so we can put our extra money in it’ – but if you stop and think about it – of course that could never be true. You cannot conceive of an invention without first having a need (or what do they say? Oh yes, that necessity is the mother of all invention.) So where did that impetus come from? People were beginning to embark on increasingly risky and lucrative international trade, and were finding that disparate geographic transactions were fraught with known and unknown risks, some of which included identity risk, currency risk, credit risk, and goods risk – ie., here I am with these spices in present day Turkey, how do I get them on a boat, get them over to Italy, find a buyer, collect on the goods (in a different currency mind you), and then get my surplus back home again? When you think of embarking on a transaction like that in the absence of a bank, it boggles the mind that international trade ever existed at all. In any case, some brilliant entrepreneur saw that there was an opportunity to provide guarantees on transactions in different forms, and thus value was offered in the form of contracts that could underwrite this precarious trade.
Fast forward to the modern day – and we see that banks are now in the position where some of that value has been eroded through the invention and commoditization of technologies that can deliver that same value much more easily (ie. cheaply), and we find that we live in a world of online only banks pushing margins on much more established, traditional banks.
What DiVanna then posits is that there are still means for banks to differentiate in the face of this competition to deliver more value to customers. One such example is through innovative pricing and specialized bundling of banking products. DiVanna notes that:
“…small businesses – especially one- or two-person shops or home-based freelancers – are not always well suited to a bank’s product and service offerings, which are laden with fees designed for larger retail and corporate clients.”
~ Joseph DiVanna, Redefining Financial Services, page 94.
This sentence succinctly puts forth the value that Zafin Labs delivers to its client banks – our software solutions work within complex banking systems to pull out meaningful data that can be acted upon, and then to allow banks to innovate by making it easier for example to create new products within a banking production environment. To think of it another way, banking systems have generally been designed with security, and not necessarily agility, in mind. Our innovation is, like the earliest bankers, to see an opportunity (innovation agility) within a difficult problem (complex, layered banking systems). Based on the quote above, there is no reason banks should not be able to offer the right bundles of products to the right customers.
I’m going to make this a regular feature of the blog (at least that’s the plan) – so I’m going to be kind of making up the rules of the reviews as I go along. I’m going to try to keep them to 100 words or less but I haven’t figured out how I’ll rate them yet. If you’ve read any of them, or have any specific questions, let me know.
Full disclosure: I keep an ‘I’m reading’ list on my profile on LinkedIn and will be using the reviews there as the basis for my reviews here. If I could just import them here, I would, but there doesn’t seem to be an easy way to embed them right now. Also, by doing it this way it forces me to think about what has changed since I wrote that review, and the update will hopefully make the review more accurate.
The Ten Faces of Innovation: IDEO’s Strategies for Defeating the Devil’s Advocate and Driving Creativity Throughout Your Organization
by Thomas Kelley, Jonathan Littman
I’m only through the first two parts of ten, but I can say already that if you’re interested in making a design-focused organization, or even just improving your marketing through empathy and understanding your customer, you’re going to want to have this book on hand. Update: I’ve kind of stalled on this one, though it isn’t because I don’t like it – I just got caught up in a few other books at the same time. While this book is not exactly how-to, it has a lot of great ideas and case studies to make things happen and provide inspiration.
13 Things that Don’t Make Sense: The Most Baffling Scientific Mysteries of Our Time
by Michael Brooks
This book is blowing my mind. There are so many interesting scientific anomalies that currently exist – from death as an aberration to the problem (or not) with dark matter – this book is definitely for the scientifically curious. Update: (I wrote the previous part a few weeks ago) I actually just finished this book last night. The last few chapters were not as good as the first few, but it’s hard to say if that was due to the mysteries being less interesting or me getting a bit tired of them. Maybe 11 things that don’t make sense would have been better.
Visual Explanations: Images and Quantities, Evidence and Narrative
by Edward R. Tufte
So far this is simply an amazing book about the role of design in great communication. When you read the part about the Challenger Disaster you will learn about statistics, understanding data, and communicating risks properly. Edward Tufte is a true gem. Update: we both hate PowerPoint. That is all.
Founders at Work: Stories of Startups’ Early Days
by Jessica Livingston
This book is great for anyone interested in entrepreneurship in general or specifically tech start-ups. It is really making me want to get something rolling on my own, which is both distracting and very exciting. I highly recommend this book. Update: I still highly recommend this book. I haven’t picked it up in the six months since I read it, but I do still plan on using one of the interviews as a basis for a one hour lesson in my entrepreneurship class at BrainBoost.
Teach Like Your Hair’s on Fire: The Methods and Madness Inside Room 56
by Rafe Esquith
I’m about to be teaching a course again and this book is giving me a nice grounding in the non-technical aspects of teaching that I want to accomplish, or re-accomplish, as it were. Very entertaining and enlightening. Update: I am teaching that class now, as above, and this book was inspiring, but perhaps it’s more for someone who hasn’t done a lot of teaching. Then it will really get you excited to teach.
Nudge: Improving Decisions About Health, Wealth, and Happiness
by Richard H. Thaler, Cass R. Sunstein
I’m reading this book because I’m a bit of a junkie when it comes to books about the brain, how it works, and how we can improve outcomes for people in general. If we can improve the lives of others by changing design, why shouldn’t we? Let the default be a great option. Update: Started reading this again recently. It’s still pretty awesome, and definitely a great place to start if you’re fairly new to the subject.
Built to Last: Successful Habits of Visionary Companies
by Jim Collins, Jerry I. Porras
A great book if you ever need to create a BHAG for a company you know little about and then give a presentation to its CEO less than 48 hours later. The Sauder MBA Capstone program – good times! Update: I haven’t looked at this one for quite a while now. It’s not for everyone, but it is particularly useful if you own/run/work for a small business and you want to set a course for the future.
The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits
by C.K. Prahalad
A great book that features tonnes of actual pragmatic advice and lessons learned from companies opening up the bottom of the pyramid. Perfect for anyone interested in making the world a better place through business. Update: This book makes you want to move away and go help the less fortunate all over the world. That feeling passes – however, that is probably a good thing, as there is always a lot of good you can do in your own backyard – like volunteer in Vancouver.
Duct Tape Marketing: The World’s Most Practical Small Business Marketing Guide
by John Jantsch
Another book I’m only part way through, but this one has had some real gems in it. For example, mapping your customers out to see any interesting relationships between them. What if half your customers all came from the same neighbourhood? What does that tell you? Maybe you have an evangelist there, or maybe seeding a new neighbourhood with customers would be a good idea as perhaps it’s just friends talking to friends? You never know what you will learn from this exercise – and this is just one among many. Update: See, this is why I force myself to do this – why haven’t I picked this one up in a few weeks? I need to finish this one right away.
The Back of the Napkin: Solving Problems and Selling Ideas with Pictures
by Dan Roam
Clearly I’m reading way too many books at the moment, but this is also a keeper. It helps show my current theme/interest, which is learning to communicate more effectively and efficiently through a number of different mediums. A lot of what I have found in here is fairly intuitive, however, like many things in life, forcing yourself to sit down with the intuitive can sometimes be quite enlightening. Update: I’m guilty here – I’m totally skimming the exercises and that is making the whole experience a lot less useful. I will update this one again in the next set of reviews assuming I go back and do these drawing exercises. Mea culpa.
One of my favorite Tufte posters – click for full-size:
As I am currently taking a graduate business degree, most of what I want to write about these days concerns economics – or rather, human behaviour. For example, I am constantly confounded by what I learn in marketing. Although the discipline is full of buzz words and applications of strategy, it all really boils down to observation of human behaviour. And there is something I really like about that. Whereas I used to believe that marketing was about changing behaviour (and, in a sense, it still is), what I am finding more and more is that we are simply there to observe and gather information and then try to make informed decisions. Certainly, there are influence techniques we study and tools we use to change buyer perception, but ultimately it is human behaviour that dictates what marketers call marketing strategy.
A pricing manager for one of the major oil companies came to speak to my class recently. One of the more interesting tidbits from the lecture was the way in which he dispelled the myth that collusion occurs among gas stations. To be sure, collusion is possible in pretty much any industry. But because of human behaviour – in this case, the price-elasticity of demand – the benefits of not colluding generally outweigh the benefits of collusion. It turns out that among consumers of gasoline identified as brand- or station-loyal (meaning they will almost always patronize a certain oil company or gas station), two-thirds would roll over on their favourite to save 0.5 cents per litre of gasoline. The effects of this are manifold: first, it means that we would expect long line-ups at a lower priced gas station when higher priced alternatives are nearby (which we do generally observe); second, and this is the part that I find quite fascinating, it means that we are willing to wait sometimes 20 minutes in order to save 25 cents on a 50 litre fill-up.
How is it that anyone can value their time at 75 cents per hour? Would you ever hire yourself out for any reason for 75 cents per hour? I should hope not. But I’m probably exaggerating slightly. So let’s say that, instead of 0.5 cents per liter, we’ll really save 2 cents per litre, and we’ll halve the waiting time. Now you’re choosing to wait ten minutes so you can keep a whole dollar in your pocket. If you own a vehicle, a dollar a week probably isn’t that much to you. Think about it for a minute. Which would you choose? $52 a year or nearly 9 hours of free time (assuming the 10 minute wait)? Of course, you’ll say those ten minutes you save cannot be condensed into one free day from work, and you would of course be right. But those ten minutes…what would you do with those? Maybe you would spend time with your spouse, maybe your kids, hell maybe you’d just take your shoes off and sit on your own front porch or balcony. But – and this is an important but – how often do you ever make a calculation like that? If you’re honest, the answer is probably almost never. Because we’re not trained to think like an economist, we don’t think like one. Instead, we strive to save money where we can, often in exchange for ridiculous amounts of time. And I am no different (to be fair, I’m not an economist either).
But it is because of this innate price sensitivity we all suffer from that it is nigh impossible for gas stations to collude on pricing. Even if a deal were struck between two gas stations, the gains to be made by abandoning collusion for one station are quite significant when you factor in the extra volume of gas you can sell by undercutting your competitor by half a penny (we expect far greater than 66% of drivers to switch to the lower priced alternative at that point). One of the pricing manager’s main job functions was to be ‘on call’ until 11 pm every evening simply to coordinate prices for all of his stations around the city and its environs to avoid any price discrepancies among them. Of course this isn’t the whole story – there are many other reasons collusion is impossible, chief among them the threat of government intervention (three studies in Canada in the last ten or so years all found no collusion). The manager we spoke with isn’t even allowed to so much as golf with anyone from a competing oil company.
Perhaps our price sensitivity is fueled by our outrage that gas prices should be so high. In the end, it doesn’t really matter. The supply and value chains of pulling a barrel of crude out of the ground and turning it into gasoline are very complex. I could go into more detail, but suffice it to say that there is pretty intense competition at each transaction level. The bottom line for retailers is that margins are low on their end product, which is why they charge exorbitant prices for bottled water and salty snacks at gas stations – it is all about getting us in the door, and it is quite obvious that we will go wherever the signs tell us that prices are lowest, even if it means a more expensive cola.
The point of all this? Well, when you’re thinking about saving money, think about how you’re spending your time (a very finite resource). Make sure it is making you happy. Imagine what you could do instead of driving across town to save $10 on an ipod, and then ask yourself, which would I rather have: $10 or an hour with my honey?