Meet The New World, Same As The Old World.

Just when I'm sure I have nothing new to say, I see that other people are saying nothing new and getting talked about.

The particular insight that caught my attention came from a Lufthansa social media executive who declared that businesses should "Make your product your ads and your customers your ad agency."

Product has always been the first P of marketing and always will be and word of mouth is the best advertising money can't buy. But to talk about outsourcing your marketing is a dereliction of duty, even if you say it at a social media conference. Outsourcing marketing is what got us into a mess in the first place.

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Looking Through Your Customers' Eyes.

A local supermarket has a checkout aisle designated for customers who are using a basket rather than a trolley. It's a common feature designed to speed shoppers through rather than have them abandon their purchases when stuck behind a line of full trolleys in another aisle.

The problem is that its speedy processing of customers means that its queue is often the shortest in the store. Cue the tired, distracted shopper with a full trolley who quite naturally joins the shortest line, usually unnoticed by the harassed till operator until they've unloaded their trolley. Cue the frustration of shoppers with baskets whose exit is now delayed.

Why does this happen? It happens because the signage indicating the status of each aisle resides high above the shoppers' heads. It's visible from a distance but the designers, the user experience gurus and the store management (I've asked) have neglected to consider when their customers make their checkout choice.

Occasionally a shopper is exploiting the situation, but generally it's an honest mistake. They're looking at eye line to determine the most efficient way out of the store with their shopping. They're definitely not gazing upwards.

The managers have thanked me for my observation and said they'll retrain staff. In other words, they'll add further burdens on busy low-paid staff when the simple act of placing an eye-level sign at the checkout entrance would get their customers to self-regulate.

It's not enough to claim that you put yourself in your customers' shoes, you've got to put yourself behind their eyes as well.

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Don't Blow Welfare Reform

No more turning of backs

Indolent Tyler is still away, undergoing therapy by serial holiday. But the recent leaks on welfare reform demand a quick post.

The story seems to be that George and IDS had a stand-up row over the latter's demand for an extra £3bn pa funding for his welfare reform programme. It apparently went like this:

IDS: "You ******* little ****. Give me the ******* money, or I'll ******* have you."

George: "**** off Grandad."

Although the Telegraph reports the exchange thus:

IDS: "I am not prepared to tolerate the appalling way you treat my department. Your officials must show more respect to my staff. They do not deserve to be treated in such an arrogant and rude way."

George: "If you come up with proposals that work, they will be treated with respect. Find £10 billion of welfare cuts – or I won't give you £3 billion for your new scheme."

We've blogged this issue many times. Alongside Gove's schools reforms, welfare reform is by far the most important long-term legacy Cam could leave. Unless we can make work pay, the inexorable growth of Britain's underclass will eventually drag us all under.

The key is to cut the horrendous marginal tax rates faced by the poor. Benefit withdrawal means that many of our poorest citizens face effective marginal tax rates of 60, 70, and even 80% - well in excess of the rates faced by the richest bankers. They have no serious financial incentive to work. That can't be right, and must be changed. Even the maddest of the mad Labour leadership candidates seems vaguely aware of that.

The problem, as we all understand, is money. To reduce the rate at which benefits are withdrawn is horrendously expensive. Calculations based on our recent TPA study suggests that to cut the effective marginal tax rate rate by 10 percentage points would cost £10-15 bn pa. Which means that the real question is what gets cut to pay for the reform?

IDS seems to have argued that the cuts should all fall on other departments - ie his department simply gets an extra dollop of cash. But with DWP already getting well over a quarter of all public spending, that was never a serious runner.

More realistically, he may have been hoping that he'd be allowed to keep the savings he makes from cutting universal benefits (aka middle class welfare). We have long argued for such cuts, which as we said last September, could easily save £12bn pa. True, that £12bn includes cuts to items that are outside DWP's budget (such as free bus passes, free TV licences, and the student loan subsidy), but our biggest item is the abolition of DWP's universal Child Benefit, which would save £8.5bn pa net of additional help for poor families. And £8.5bn would give IDS just the money he needs to tackle the welfare trap.

Neat.

Except of course, for two things.

First, whacking the middle class to improve incentives for those famous dole scroungers and single mums might prove a tad "controversial".

And second, there is no money.

Let's just repeat that second point in case you missed it.

There is no money.

Or to put it another way, DWP has to contribute to the overall cuts package. The overall welfare bill - around 30% of total spending - has to be cut. IDS may want to keep the savings he makes on cutting universal benefits, but George can't afford for him to do so.

Which only really leaves the third option - the one we argued for in our welfare reform paper. We have to cut the poverty line. We have to recognise that we simply can't afford to fund welfare targeted at 60% of median income while at the same time making work pay. And our proposal was that we should redefine the poverty line down to 50% of median income.

If we did that, IDS would have plenty of cash to work with. On our estimates, setting the poverty line at 50% rather than 60% saves £20-30bn pa just on the welfare paid to working age households (ie leaving pensioner welfare untouched).

So is IDS thinking about that?

We certainly hope so. Although clearly he won't want to divulge as much to those penny-pinching accountants over at HMT.

But whatever the arguments, and whatever the heat, the most important thing is that IDS sees this through. We simply can't afford another wibbly wobbly government whose only solution is to spend even more on welfare and leave us with even more dependency.

PS Tyler must confess to being shocked when he heard that Matthew Elliott is moving from running the TPA to heading up the no2av campaign. Matthew is a real star, and has been the driving force behind the TPA's growth and success. Of course, he will do an outstanding job with the new campaign - and if anyone can stop this self-serving dilution to democratic accountability, he can. So naturally we wish him every success. Besides which, he will be returning after the AV referendum. But the TPA is bound to miss him. The bright side is that he will be leaving the TPA in the more than capable hands of Matt Sinclair, currently Research Director. Tyler knows Matt well, and never fails to be impressed by his ideas and energy - he has big shoes to fill, but he has the big feet to match. So the very best of luck to him, and to everyone else in the team.

PPS The HMT official who upset IDS so much is one Miss Lombardelli. According to the HMT organisation chart she is Head of Labour Market Policy. Not quite sure what that entails, but with a wonderfully scarey name like that, I'm betting she routinely makes officials in the spending departments offers they can't refuse. HMT has always featured a sprinkling of strong scarey women. During Tyler's time, he worked directly for one, and had frequent dealings with another. The thing about them is that they have to be strong. It's a robust environment where wilting isn't allowed - Tyler can still recall the shock of transferring there from the sedate cosy world of a spending department. And for women it's probably even tougher - even in 2010, not one has ever made it to Perm Sec. Sounds like IDS's officials need to get real.

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Make Marking History?

Further evidence of marketing's identity crisis. Though the parallel with marking one's territory has some validity.

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How Much Do Customers Care?

I think Umair means to highlight the importance of corporate purpose in the mind of the consumer though he tweets a little ambiguously. If that's a correct interpretation, then he's positing a prevalent thesis. One that's certainly useful to think about, albeit one that equally can lead us astray if we focus on purpose at the expense of the basics.

Look around at what people do and look at your own behaviour. A "moral" element might be the deciding factor in a choice between equals. While I'd like it to be different, I'd currently contend that most of the people, most of the time don't care - for a variety of reasons that include but are not limited to personal finances, convenience and ignorance.

That said, never, never forget that some of the people some of the time still constitutes a very big market.

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Memory Of The Future.

Memory of the future is the provocative phrase that I came across recently that refers to the brain's ability to use memory to picture and plan future events. I term it provocative because of its combination of memory a word that evokes looking back and future that evokes looking forward.

Being ignorant of its neuroscientific origin, I immediately conjured up the idea of memories of what we were told the future would bring - the ones that usually involved personalised-jetpacks and dehydrated food.

Inevitably memories of the future are usually unfulfilled, but the whole concept is so redolent of ambition, aspiration and lost opportunities that it seems to me to be a rich seam for marketing to mine. While it's uniquely individual inasmuch as it combines memory of what we expected the future to look like and what we hoped our own personal futures would become, it taps in perfectly to the whole idea of consumption being about creating that future.

I'm not sure yet where this lead, but if your product/service could promise that our memory of the future is, in fact, our future, that would be a compelling first step.

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50 Ways To Leave Your Customer.

The Jet Blue flight attendant who quit his job via the emergency shute and the fake Dryerase resignation video were the big things online yesterday.

Both earned admiration from many quarters, but how many of you thought of the lesson for your business? What was being admired was people who had supposedly fired their customers. Steven Slater had had enough of rude customers while "Jenny" was sick of her customer i.e. her boss.

If you choose someone to be your customer then they are nearly always right and your behaviour should reflect that, but you don't have to accept everybody who wants to be your customer. So, if you admired Steven Slater and/or Jenny then you should surely run your business the same way. You'd feel better about it and you'd have a better business because you'd care more.

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Old Spice Addendum.

AdWeek reports that, “According to Nielsen data provided by Old Spice, overall sales for Old Spice body-wash products are up 11 percent in the last 12 months; up 27 percent in the last six months; up 55 percent in the last three months; and in the last month, with two new TV spots and the online response videos, up a whopping 107 percent."

If it's up 11% in 12 months, it could probably only be up 107% in a month if the sales had been negative in the interim so I think my original suspicions seem credible.

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App Infatuation.

Briitsh Gas have an iPhone app. They told me so in a press ad. It will show how my consumption has changed year on year, quarter by quarter.

That's interesting information, but I don't need an app for it. I can see it on my provider's bill already - at a time when I'm more likely to be thinking about the issue and where they already have my attention.

Just because you can have an app, it doesn't mean you need one or that your customers' experience will be enhanced by having one.

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Time To Bank The Banks

Taxpayers could use some of that

The banks are back in the serious money. Hurrah!

Well, hurrah if you're not a saver being ripped off on your bank deposit account, with near-zero interest rates in the face of 5% inflation. Or a borrower paying through the nose for a meagre sliver of credit. As long as you're a banker, you can afford a very loud hurrah indeed.

But bank shareholders, surely they ought to be cheering as well. And that includes us taxpayers, because we're still sitting on all those bank shares.

Just as a reminder - in case you'd somehow forgotten - we currently own not just the Crock, but also 27.6 billion (yes, I did say BILLION) shares in Lloyds, and an astonishing 90.6 billion shares in RBS.

Hurrah!

The question is why aren't we selling them yet?

We've blogged this before. Not only does the government have no business owning commercial banks, but the price of these things has moved right back up again. Indeed, Lloyds is now back above our 72.2 pence average purchase price - we're actually in profit!

Tyler's fag packet says that at current prices our stakes in Lloyds and RBS are worth £68bn. Money we could use immediately to reduce our gigantic national debt.

What's that?

Hold on because bank share prices are bound to head even higher?

My friend, if you feel that way, my strong advice is to remortgage your house and family and snap up some RBS shares while stocks last.

The truth is that nobody has the faintest idea where bank shares are heading. And governments should not be in the business of punting around in the equity market with our money.

********

Tyler is now taking a few days break.

But as a parting shot, let's just note the public appeal to help victims of the catastrophic floods in Pakistan (you can donate here).

Obviously we all want to help. But most of all we want our government to get emergency relief out there fast.

Is DfID up to that?

Why does it always seem that serious help takes so long to organise and arrive on site? Disaster zones seem to be crawling with western TV reporters long before the official relief effort finally gets into gear.

As we've blogged several times, the vast bulk of DfID's £7bn budget goes not on humanitarian relief of the kind they're dying for right now in Pakistan, but on economic development where the evidence of success is virtually non-existent (eg see this blog). The priorities seem entirely wrong.

It makes Tyler angry.

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Customer Survey Dissatisfaction.

Modern life is replete with customer satisfaction surveys impinging on seemingly every digital, telephonic or physical interaction and CEOs citing how x% of their customers were "either satisfied or very satisfied" with the service they received. It's also replete with dissatisfied customers.

So before you undertake one of these exercises, perhaps you should ask what its purpose is. Are you seeking to elicit genuine information or are you box-ticking? Do you want to learn or to obfuscate?

What does satisfaction actually mean? We all have different satisfaction spectra determined by our previous experience, so it's pretty meaningless to survey it. Even if we were consistent in our appraisal, there's the timing issue. Our satisfaction is dependent upon our happiness relative to when we're surveyed because memories fade.

Crucially - the dissatisfied customer, the target you're really trying to find will either have forgotten it happened or more likely will no longer be a customer and their dissatifaction will not be captured.

The key to increasing customer satisfaction is to improve your product and service. It's not to bias a survey.

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Council House Sales - Another Taxpayer Rip-Off

Tyler will have bored you many times with his cigar-puffing reminiscences of growing up on a council estate in the 50s. Deprived? Of course not - back then, a quarter of all families lived on council estates. With another one-third renting privately, for the bulk of the population owner-occupation still lay well into the future.

Today, the percentage who live in council rented property has fallen to just 9% (England - facts here). But add in the percentage living in other social housing (Housing Associations etc), and the total is 17%.

Which is a bit surprising. Given that since 1979, around 3 million council and social houses have been sold to sitting tenants under the right-to-buy scheme (and note this wasn't all down to The Evil Tories - the sales continued under Labour).

What that means - and I do apologise if this is the bleedin' obvious - is that councils and other tax-funded landlords have built more homes to replace those they've sold. In broad terms, across the UK, they started in 1979 with 6 million homes, and now have 5 million. Given that they sold 3 million, that means they built 2 million.

In effect, the taxpayer has been funding a speculative property developer. The developer - S Shopper Homes plc - has built millions of homes in order to flog them off later.

Unfortunately, unlike property developers in the real world, S Shopper Homes has sold its properties at below market prices. Well below market prices. Sitting tenants have been allowed to buy at considerable discounts.

Over the last decade, the price discount in England has averaged 37%. Which works out at nearly £11bn in cash terms. And going back, discounts were even higher. As recently as 1998-99, the average across England was an astonishing 50%.

We haven't been able to track down all the data going back to 1979, but on the basis of what we know about the last decade, we estimate that the total cost to taxpayers of these discounts in today's money has been well in excess of £50bn (ie roughly one-fifth of the sales took place in the last decade, and they cost us £11bn... plus, the historic discounts were higher).

Now, we do understand that the original Mrs T had other reasons for flogging off council houses. And we do understand all that stuff about a property owning democracy. But what we want to know is WTF did S Shopper sell these things at such huge discounts? It's our friggin' money.

And there's something else about council house tenancies as well.

Whether we like it or not, there are some people who just aren't capable of funding and/or managing their own accommodation. Sure, we can let them sleep in a ditch, or reopen the workhouses, but realistically, the Major aside, most of us would not sign up for that. Realistically, taxpayers are are on the hook to house them.

The real choice is between funding them in private rented accommodation - with all the expense and problems we blogged yesterday - or putting them into social housing of some kind.

But we need to remember one very important thing. As Cam said yesterday, allocation should be on a needs basis. Social housing must be seen as part of the welfare safety net, and there can be no right for a tenant to occupy a particular house for ever.

And in future, there can definitely be no right for sitting council tenants to buy out the taxpayer at a knock-down price.

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Ripping Up The Rent Book

Good news for landlords

One element of the welfare bill that's got totally out of hand is Housing Benefit (HB). During the Labour government, it soared by 35% in real terms, and this year it will cost us well over £20bn.

There are currently 4.7m households receiving HB, which is getting on for one-in-five of all households. Or to put it another way, every family paying for its own housing is also paying a quarter of another family's housing costs.

In some areas it's even worse. 30% of all households in inner London are on HB, and in Hackney it's an absurd 43%. This chart shows the 11 Council areas above 30% (Aug 2009):

So what are we going to do about it?

In the June budget, George set out his plan. First, he imposed a fixed maximum cap on the reimbursement of housing costs, irrespective of where they are (£400 a week for a four-bedroom property and £250 a week for a two-bedroom home). Second, he announced that from 2012, the maximum reimbursable rent for each HB local area (there are 153 of them) will be reduced from the median of market rents for that area, to the 30th percentile, and will thenceforth be uprated annually in line with the Consumer Price Index, rather than market rents. He reckons those changes should eventually save £4.2bn pa.

Needless to say, he's picked up some serious flak. The left-wing press warns:

"Thousands of people will be made homeless as public spending is slashed because of a dangerous combination of higher unemployment, increasing repossessions and cuts to housing benefit...

The retired, disabled people, carers and working families will be hardest hit and charities predict it will trigger the steepest rise in families living in unsuitable accommodation and individuals sleeping rough since the 1980s.

Those in London will be the worst affected, forcing an exodus of poorer people from the centre to outer boroughs... The homeless charity, Shelter, said that some households in London currently receiving housing benefit will have to find a shortfall of up to £1,548 a month to meet their housing costs. The result, say opposition MPs, will be "social cleansing" of poorer tenants from richer areas."

"Social cleansing" - a slogan worthy of the great Bishop Snow himself. To be frank, we've never been able to understand why poor families should expect to be housed in rich areas at public expense. Apart from anything else, doesn't the left's position on equality say we're all much happier if our neighbours are not miles richer than us?

But setting that on one side, why does the left automatically assume HB recipients will be rendered homeless or otherwise cleansed? Why don't they consider the possibility that many landlords may be forced to cut the rents they charge?

Because what we have here is another classic escapade of the Simple Shopper. The very same S Shopper who managed to bungle us into the ludicrous GPs contract and all those overpriced PFI contracts (see many previous blogs on both). And what he's done here is to bumble his way into the private property rental market and spray huge amounts of our money in the direction of Britain's buy-to-let landlords.

A recent article in the Investors Chronicle gives a good flavour of how it has worked out:

"Nathan is an experienced investor who bought a portfolio of five terraced houses in Burnley in Lancashire five years ago, paying around £35,000 in total. "The houses are well built. The problem is the tenants aren't," he says. "I didn't buy for capital gain, I bought for income. In this area, everyone is on housing benefit, and there are guaranteed rents of £65 a week." In theory, this adds up to an astonishing gross rental yield of 48 per cent...

...Graham owns a substantial portfolio of property in the north east, and says he's been letting to tenants on benefit for donkey's years. "It's like being a second hand car dealer," he says. "The mark-up is high, but it's the shitty end of the stick."

In problem neighbourhoods, it is possible to buy houses for as little as £6,000 from desperate sellers. Graham claims he can receive up to £3,000 a year in rent on these houses from local authorities - a 50 per cent return on equity."

Now gross rental yields of 48% and 50% returns on equity are telling you something. They're telling you someone is paying through the nose. And there are no prizes for guessing who. The S Shopper has come into the market with a fat wad of cash and pushed rents far above where they ought to be.

Consider the facts. As we noted above, since 1997 the cost of Housing Benefits has increased by 35% in real terms. Yet the number of HB recipients has hardly changed - 4.7m now compared to 4.6m in 1997. Which implies that most of the increase has been driven by a sharp rise in rent levels.

So what happens now George has grounded the Shopper? Now that he's imposed his own lower rent levels over the heads of the landlords?

Well, the landlords are naturally saying it could mean the end of their participation. After all, they're dealing with some pretty scummy tenants, and the least they deserve is a sensible financial return. As one of them explained to the Investors Chronicle:

"Every now and then you get a nasty shock. Drug dealers operating from a property; someone found dead after ten days; a tenant who hacked into the attic and sold the hot water tank for scrap metal. The RSPCA once boarded up one of my properties as the tenant walked off, and left behind a menagerie of reptiles...

You don't know the tenant has moved out until the housing benefit stops, then you find out your property's been empty for 30 days and invalidated your insurance. If a tenant trashes the place, you have to fork out £3,000 on magnolia and new carpets."

All of which sounds pretty bad.

And as the always instructive Mr S and M points out, the economic research in this area confirms that it is the landlords who will suffer the biggest hit. The evidence says that between half and all of the cut in rental subsidy ends up falling on the landlord not the tenant. In other words, rents fall pretty much in line with the cut in subsidy - just like George intends.

The question then is how much will the supply of private rented housing to those reptile owning HB recipients shrink in response?

And the answer is we don't really know.

But set against returns of 50% on equity, our guess is that rents could fall quite a bit before from current levels before we hit a big fall in supply.

George is quite right to rip up the rent book.

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