Saturday, February 8, 2014

Is there a good way to fire your customers?

During the Super Bowl, Radio Shack ran a (highly praised) 30 second ad about how they're abandoning their 1980s image to unveil a “new” Radio Shack. The ad featured 80s celebrities like Mary Lou Retton, Hulk Hogan, CHiPster Erik Estrada, Alf, the California Raisins and "Cliff" from Cheers.

In other words, they spent about $4 million to proudly announce they are firing some of their old customers to better appeal to new ones. And as part of the firing, they’ll be closing one store out of every nine.

The company certainly faces major challenges. Their original business of selling parts to hobbyists and tinkerers has gone away. The competition in selling electronics (from Best Buy, Target, Wal-Mart and others) is fierce. And, perhaps worst of all, the convenience of a neighborhood storefront where you make a quick stop is being destroyed by the depth of inventory and price-cutting of the seemingly unstoppable destroyer of retail, the Bezos Empire.

The intended makeover reminds me of JC Penney, whose new CEO fired all their old customers in a (vain) hope to win over new, up-market ones. When it failed, JCP fired him, brought back their old CEO and desperately tried to woo back their (once-loyal) customers.

You’re Fired!

This sort of decision has two key points. First, the company feels it needs to attract a type of customer they are currently not reaching. In the JCP case, it seems to be because they are higher margin, whereas for Radio Shack, it's because there are more of them.

But is there every a good time to fire your customers? Usually the firms that do it are desperate and are stuck between two bad choices.

In these two examples, I was fired twice. In Radio Shack’s case, I get it — the niche of people who own soldering irons is too small to support 4500 (soon 4000) stores. Besides, the company has already eliminated much of the inventory that once attracted us to the store, with only a fraction of the parts that it once had.

For JCP, I thought they made a major mistake, and apparently the board agreed. The value clothing segment is a large one — growing due to declining incomes over the past five years — and JCP held a strong position here. There's a lot to work with and this market segment isn’t going away.

My previous favorite clothing retailer was Mervyn’s before they died five years ago. Now I use Costco when I can — because of convenience, price and quality — but their selection means I rarely can. The selection at Target is limited, the quality at Wal-Mart is suspect, and so for most of my clothing I value having a full-service clothing retailer like JCP (particularly given I’m a nonstandard size). The only reason I don’t use it more is that (unlike Mervyn’s) it’s in the larger mall rather than more convenient strip mall.

Death of Freemium?

Finally, this week I was fired a third time. Instead of an iconic 20th century Main Street retailer, this was a (me too) 21st century Silicon Valley internet services company. The cause was also different: instead of declining customers and margins, this was a company with a freemium business model that never worked to begin with.

The company is SugarSync, a DropBox imitator that notified customers December 10 it was terminating the free part of its freemium business model, effective February 8. Although the early software was buggy, I loved the service because it worked with my hard disk organization rather than (as with Dropbox and later Google Drive) forcing me to adapt to its model.

Sugar’s decision meant that I’ll have to use Dropbox or Drive and work around their limitations. Not the end of the world. I forgot about it entirely until I got this week’s email, urging (imploring) me to convert to paid membership.
I don’t envy them: people are addicted to these services but (like the rest of the Internet) not paying for them. In a recent class of about thirty 21-39 year-old graduate students (at an elite biotech institute), I asked how many of them use Dropbox. Every hand went up. When I asked how many paid, not a single one of them raised their hand.

It appears Sugar is hoping to segment their market and serve those who need more than they (or their competitors) provide free. After having raised $60+M in venture and (now) debt financing, my guess is that the need to get to positive cash flow has become urgent.

Given how crowded the segment is — and how little traction they got — I wouldn’t be optimistic. The only hope is that other companies give up on free and condition people to pay, but it’s hard to imagine either Google or Microsoft pulling back from freemium entirely. And with Box recently offering 50gb free (vs. 2gb for Dropbox) the trend seems to be in the other direction.

At the same time, it calls into question the viability of the freemium business model, which always depended on a non-zero upgrade rate. I certainly wouldn’t want to start a company nowadays with a business plan that assumed freemium would generate enough revenue to pay the bills (let alone the investors).


Kenneth M. Kambara, Ph.D. said...

Nice blog post. E-commerce books like to talk about RS's bricks & mortar advantage for customer service, but I see it more as a potential advantage. The last few times I was in a RS were in Layfayette, CA & White Plains, NY, with both heavily pitching cell phones. I could see some value if the stores were tied to catalogues like TigerDirect, OWC, or Newegg & I could go there for pickup (ostensibly to shave a day or so off of shipping or, lo, be able to get some high traffic items that are stocked in the back. I have to be in the right mood to hit Fry's & if it's not the first thing on a weekend morning, I'm usually not up for it. That said, I'm not sure a retooled product mix & last mile pick up can feed the bulldog. Like you say, it's hard to go against Bezos.

JCP is in a positioning no-man's land, along with Kohl's. Both have made similar mistakes, interestingly. Anyway, firing customers is always risky without deep pockets for customer acquisition. Is it "shareholder theatre"? Maybe. Rebranding selected stores in selected markets may have made more sense, but that's neither exciting nor dramatic. I'd have to see their 2008-2011/12 store-level numbers back up my idea.

Freemium is tough. I wonder if some framing effects can help create perceptions of value à la Dan Ariely's work. Maybe value propositions need to be stronger. Dropbox is cool. I use it. Would I spend money on it? Maybe. It would have to offer me some cool cloud application that I just have to have.

Joel West said...

I don't see JCP in no man's land, but maybe a weak position in a difficult territory. (Kohl's seems to be doing better). It may be that the big box clothing store -- like the big box book store, electronics store and toy store -- is going the way of the big box record store.

I think the problem with Dropbox is that they and their competitors gave too much away for free and conditioned 99% of their audience to expect free. Now the entry barriers are too low to keep out other firms offering too much free — just like discount airlines entering in the 80s or 90s.