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Uncategorized

Why Default Settings Matter

In a fascinating talk at the TED conference, Dan Ariely asks the following question, “What determines whether or not someone decides to donate their organs?” When you look at the data, there is a striking difference between two types of countries in the world. Some countries have an organ donation rate of close to 100% while others hover much lower — not reaching beyond 30%. What could possibly account for this difference especially among countries with similar cultural and ethnic heritage? Why would Austria be so much higher than Germany? Or Sweden be so much higher than Denmark?

Arielly points us to the paper “Do Defaults Save Lives?” by Eric J. Johnson and Daniel Goldstein. A default choice is the choice that a customer makes by doing nothing — e.g., always using Internet Explorer to browse the web because that’s the way things worked when you bought your computer (in fact, the Microsoft antitrust case in the late 90’s revolved to a large extent around these default choices.)

This startling difference in participation in organ donations is tied to how the question is worded at the DMV. In some countries, the question is worded “Check this box if you want to be an organ donor.” In others, the question is worded “Check this box if you do not want to be an organ donor.” If the question presumes that you will donate an organ, you will. As Arielly points out, it’s not because people are lazy, it’s because, the decision is so important that it is paralyzing for people to make for themselves. They shouldn’t have to choose what to do — someone should make the choice for them and “the sysem should just work.”

When the people at the DMV created these forms, did they realize that they were going to have the single most important effect on the state of organ donations in their country — certainly not. But that’s the point. To a large extent, the default behaviors that the designer created are those that will stick.

Certain choices, especially those with high stakes and low information are very hard for people to make. Let’s look at one product in specific that people need — 401(k) programs. Logically you would think that the more choices you gave someone on their retirement plans, the more likely they would be to join one of the programs. However, as a company adds additional plan choices the rate of participation actually drops because consumers don’t know what to do with all of these extra choices. Richard Thaler and Cass Sunstein talk about this paradox at length in their book Nudges. They discuss an innovative solution to the 401(k) problem with the “Save More Tomorrow Program.” The idea is that most people don’t change their 401(k) options once they join a company. Therefore, the plan should, by default, change your options for you. So this plan increases your 401(k) contribution at the beginning of each year, right at the time you get a raise. This is around the same time most raises are given out so people don’t feel like they are losing any money. The company does the “right” thing for you if you decide to do nothing. This is an example of nudging the customer in the right direction or in technical speak “Libertarian Paternalism.” It allows people to make their own decisions, but presents them with the best option for themselves as the default choice. It’s the equivalent of saying “You can have whatever you want with dinner but I’m serving skinless chicken with fresh vegetables.”

As product designers, we often expect customers to make the best choices for themselves given enough options. However, as we have seen, in many areas, people don’t choose what is best — they choose what is easiest. There are very few products that customers will engage with and learn how to use the myriad of features. If you still don’t believe me, take a look at this New York Times article on the relatively few applications downloaded on the iPhone. Remember that for the vast majority of consumers they won’t be changing their default settings, so make sure that the product works great right out of the box.

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Product Management

How to Make Online Shopping Simpler

When companies design clever new products it’s easy to focus on creating cool new features without thinking about how a customer will actually use them. This often leads to products that were designed to do amazing things but aren’t used to any level of their capacity.

This frustrates consumers because they bought this product with all these great features but can’t figure out to use it. And it frustrates designers because the features right in front of them. The problem is that most customers aren’t interested in figuring out how every feature on every product works. This doesn’t make customers stupid, it just makes them busy. It’s hard to believe for some product designers but the vast majority of our customers don’t care about their products nearly as much as the product designer does. The customer wants them to serve their purpose and then move on with their life.

Microsoft’s Bing search engine takes this idea to heart – at least in its advertising and market positioning. Microsoft has been in a fierce battle to regain market share in the search arena for some time. Since the days when MSN pitted itself against AOL as the leading search destination, Microsoft has been having a tough time. Their search engine was rebranded “Live” which didn’t work out very well and has now been transformed into “Bing.” Instead of trying to duke it out search engine to search engine, Bing has declared itself to be a “Decision Engine.”

You’ve probably already seen Bing’s advertisements marketing it as a Decision Engine. Bing has a number of different videos to explain itself. I found the product tour video particularly interesting.  My only problem with the video is that many of the features promoted are ways of getting at information not making better decisions. Also, many of the features are those that Google and Bing have in common. These are great features that try to predict what the customer “really” wants based on their search query. For instance, when you search for “Mets” you get the current score of the game. If you type in an address, it shows you a map of the area. A further poke at the “innovative” nature of Bing is the organized results on the left column of the page. While I like this feature a lot, it’s an awful lot like the defunct Northern Light Search Engine from a decade ago. 

But a “Decision Engine” should go beyond providing information to actually helping to make a decision – like “What is the best digital camera to buy?”   Bing attacks this problem by aggregating a lot of data from around the web and presenting it together. Therefore you can compare cameras on ratings, features and any number of attributes. It’s a tantalizing problem because for product designers, researchers, and developers who can continue to gather more information and create even prettier ways to display it. They feel that the more information they give you the better decisions you can make. The problem is that most people don’t know how to use this information. Even if they understand it, do they know how to make the trade off between the different information e.g., size of a camera and image quality? And Bing doesn’t help you determine the most significant characteristics for you. For example, if you’re a hard core photographer you probably have thousands of dollars worth of lenses and really only care about camera bodies that support those lenses.

In order for any of these factors to make sense, customers need a framework to understand how they fit together. One way of doing this is to create a buyers guide with advice from top authorities on the topic. Even photography snobs like to listen to other photography snobs on the best cameras to buy. For a great example of this, just look at  Philip Greenspun’s equipment guide on Photo.net.

But all of the product designers and PhDs at Microsoft research have a problem with that – it’s far too simple. Just have experts tell us what the best things are? That doesn’t use any of the massive computing power behind the super powerful internet cloud. It doesn’t – but it solves the problem.

A slightly more technological way of getting to the same place is trying to understand the customer – asking them who they are and what they want to use the camera for and then providing them suggestions. To me, that’s a decision engine. If someone wants a good camera that takes good and simple pictures they want a very different camera than an enthusiast that wants all the latest features. Then the Bing shopping engine would make a lot of sense. After asking you who you are, it can provide a customized list of products based on the features that matter most to you. Also, you would understand why these features would make sense for you.

I think my favorite “Decision Engine” on the web is “Uncle Mark”  – an annual almanac of sorts written by Mark Hurst the founder of Good Experience. Mark Hurst is a guru of the “simpler is better” school of thought and is a strong proponent of the user experience. In the sixth edition of the Guide and Almanac published in November 2008 he recommends his favorite products across a number of dimensions.  And what does he choose for a camera? He created a Phone, Camera, etc. category and declared the iPhone the winner. Why? Because a camera that you have with you all the time is the best camera of all.

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Product Management

Radical Cost Innovation

I remember visiting Bill Gates’s house in 1998 when I was an intern at Microsoft. Next to priceless tapestries hanging in his hallway were plasma screen TVs displaying images from Corbis – the library of images that he owned. The TVs were about 25” across and priced at about $15,000 a piece – the best TVs that money could buy. Bill Gates is the classic early adopter – someone with a lot of money who is more than willing to pay for superb products. Gradually products are refined and prices come down, making these latest and greatest gadgets available to the rest of us. Obviously the first few items are costly to produce and therefore are only available to those with the most money. But what if that weren’t exactly true. What if products were created where the early adopters weren’t the richest people but someone else entirely?

This brings us to Sam Farber. In 1989 Sam’s wife Betty was struggling with horrible arthritis and found it difficult to use many common kitchen utensils. Farber started to look for easier to use tools but found none were on the market. So he decided to build his own. He hired Smart Design, a New York based design firm, to create a set of kitchen utensils that Betty could use. The designers watched people with arthritis use their kitchen utensils like scientists in a laboratory, noting the difficulties they had, making changes and measuring their effectiveness. Based on these findings, they created products that overcame those needs while also ensuring that the tools were attractive, affordable, and high quality. Since its founding OXO has become one of the most popular brands of kitchen utensils in the world. They are most famous for the OXO Good Grips handle that delivers maximum leverage and minimum force. Another product from OXO is their jar opener that allows anyone to open jar lids that are stuck. What Farber proved to the rest of the world was that it’s not just the arthritic that like easy to use kitchen utensils, it’s everyone.

By carefully examining the difficulties of arthritic people with their kitchen utensils, Farber was able to transform an industry. But let’s take it one step further – who is hurting the most in the world? Who is the exact opposite of the traditional early adopters that we visualize: The Third World poor.

Designing products for the world’s poor requires radical cost innovation to make them affordable. In traditional innovation we had products that started at high prices that gradually came down. In radical cost innovation, the idea is to create something that is extremely cheap and gradually increase the quality.

We generally think of cost being proportional to quality. Therefore something of very low cost would be very low quality. In reality, performance divided by price equals value and high value products are very much sought after. Take the example of Toyota – probably the brand that stands for value more than any other in the world. Today Toyota stands for a good car at a fair price that never breaks down. This level of quality wasn’t created by building a million dollar car and gradually stripping it down. It was created by relentlessly focusing on waste and cost until all excess costs were eliminated.

This idea of radical cost innovation is not new. The idea is based on Clayton Christenson’s “Disruptive Innovation” in the Innovators’ Dilemma where he discusses how mainframe computers (e.g., IBM) were gradually driven from the market by inferior but much less costly mini-computers (e.g., DEC) which were gradually driven from the market by the inferior but much less costly micro-computers (e.g., PCs and servers). When each of the attackers (e.g., micro-computers) were introduced, the incumbents (e.g., IBMs) of the world thought that these computers would never be able to compete because they weren’t powerful enough. However, over time, the power of micro-computers increased rapidly and the micro-computers were able to take over much of the “real” work at a much lower price. Christenson’s key point is that cheaper technologies get better faster than better technologies get cheaper.

Another take on the cost innovation idea is in the article Format Invasions from Strategy and Business Magazine. The authors point out that most companies are looking for the next “Killer App” that will totally transform their industry (e.g., Apple iPhone). However, industries are often transformed by radically lower costs. Think about how Southwest Airlines transformed the airline industry by introducing the concept of the discount airline to the American public. This is a trend across many industries: Dell in computers, Wal-Mart in retail, and Nucor in steel. In the words of the authors “massively lower cost is the killer app.”

Taking these ideas forward, if companies could create products that had radically lower costs for Third World customers, they would have a tremendous market advantage. While these products would be inferior at first, companies can increase product performance but keep a radically lower cost base. This would lead to products with a value higher than anything currently seen in the market.

The most famous of these innovations is Tata Motors “Nano” that was released in early 2008. Historically multinational auto manufacturers have thought of the third world as an afterthought—waiting for incomes to rise so that they could buy developed world products. The Nano is a car built primarily for the Indian market where the average GDP per capita in India is about $3,300 per year vs. about $41,800 in the US. The base price of the car was 125,000 rupees (about $2,500). This is about half the price of the cheapest car in India and about five to six times cheaper than the entry level models just about anywhere else. Interestingly, Tata also owns the brands Jaguar and Land Rover. We obviously won’t be seeing at $2,000 Jaguar any time soon but don’t be surprised if we see some of the cost savings of the Nano delivered to some of the world’s top luxury brands.

CK Prahalad, the World’s foremost proponent of Third World Innovation, has been involved in a number of cost innovation projects for the world’s poor which he discusses in The Innovation Sandbox. In one case he helped Ginger Hotels to fundamentally rethink what it costs to run a hotel. Ginger Hotels (formerly Indiaone) has recently opened a hotel in Bangalore that provides rooms for about $20 a night vs. the $300 for other hotels in the area. Each room has an attached bathroom, wireless internet and an LCD TV. While most hotels make a 30-40% profit Ginger clocks in at 65%. One element of savings is in labor. In a 100 room hotel, Ginger has seven employees vs. 50 for a motel or 130 for a modern hotel. Everything else is outsourced.

But perhaps the most amazing Third World innovation is the Jaipur Foot, an amazing prosthetic that allows India’s poor amputees (many of whom were injured by land mines) to live normal lives. The device was a collaboration between master sculptor Ram Chandra and an orthopedic surgeon Dr. P.K. Sethi. The device is designed to be fabricated at a very low cost by relatively unskilled laborers. Even more impressive, the device is built to support the lifestyle of the working poor which includes walking barefoot and squatting. The device costs a mere $30, far less than the $8,000 to $10,000 similar devices cost in the US.

So how can large US firms respond? If large multinational firms do not attack the problem they will be at a tremendous cost disadvantage when foreign goods become good enough to enter US markets. However, there is a simple solution. Invest in making products for the world’s poor. This does not mean simply outsourcing to India to reduce the cost of products. I am talking about radically changing the price point of a product so that it can be afforded by the world’s most indigent people. This strategy has many advantages:

  1. Develop New Technologies
    The main reason to do this is to increase the level of technology in the business. This technology could be used to make products more cheaply and increase profit margins, defend against competitors, or even block competitors in with patents in developed markets.
  2. Cheap to Develop
    One of the great advantages to building products for the poor is that there is a relatively low cost to implement. In order to sell the products at a price that the customers can afford, manufacturing costs must be held extremely low compared to those in developed countries. This allows companies to do this research at a relatively small investment level.
  3. Doesn’t Affect the Core Brands
    Companies would create an entirely new company to product these products. These firms would be making products under different brands. There is little chance that the main brands would be cannibalized. Eventually these products will provide competition when they are good enough to enter the developed world; however, this would happen whether or not the multinationals were invested in these technologies.
  4. Frequent Presence on the Supply Side Already — Outsourcing
    A large number of global companies are already sourcing knowledge work from India and China. This workforce could be leveraged to make and sell products to the poor people in these areas. Sourcing this work from the same regions as the target customers would provide key insights and the ability to test easily.
  5. By Delivering Value to Those Most in Need, Companies Can Make a Real Difference in the World.
    Simply put, this is one of the cases in business where companies can do a tremendous amount of good while making a tidy (if not huge) profit.

Bruce Sterling, the science fiction writer once said, “The future is here, it’s just not evenly distributed yet.” We are all waiting to buy the latest and greatest products that the rich and famous have today. Once they come down in price we will all have virtual reality headsets, Japanese super phones, automated homes and whatever else is dreamt up by the mad scientists in the back rooms of universities and corporations. At the same time, whether we realize it or not, we are also waiting for the next generation of radically lower prices from the Third World. These products are already being developed and it’s up to US companies to step up to the plate to maintain their competitive advantage or face being disintermediated by cheaper technologies.

Categories
Technology

The Death of the iPod

Since its introduction, people have been prophesizing the death of the iPod. They saw the Ipod as just another Apple creation that would end up like the Mac. When the Macintosh was introduced, it was by far the most innovative and successful product on the market and sold very well. It had a graphical display and mouse that were far easier to use than the IBM machines available at the time. However, Apple never partnered with other companies, hoping to build the hardware and operating system itself. Eventually a consortium of companies succeeded in building a “best of breed” product that exceeded the abilities of the Mac at a cheaper price. IBM (then Compaq and then Dell) built the hardware, Intel built many of the chips, and Microsoft built the Operating System.

It’s easy to believe that that Apple will always behave like it did in the Macintosh days and will always end up with the same results. John J. Sviokla wrote an interesting piece in Fast Company called In Praise of Ecosystems that summarized this argument well. On a personal level I think of it this way. If I buy a lot of music from Apple today, will I be able to play it on my portable audio device in five years. If history is a guide, Apple will make it very hard for me to do that. Therefore, I would rather not buy Apple protected music today, but that’s just me. However we may be in the minority. While I think that it might not be the best idea to trust Apple to let me play my music in the future (even though in theory I could burn to CD or create an MP3), Apple has already sold 500 million songs.

I predict that one of the following scenarios will take place:

A better ecosystem will evolve. In this case, as stated above, Apple will lose its lead and get pushed out of the market by the other companies.

Portable media devices will eventually converge. I feel that this is almost a guarantee. At some point people are going to get sick of carrying around their iPods and their PalmPilots and their cells and demand one device. Also, the cost of each of these devices, or to be more accurate “capabilities” will drop far enough to make such a device very affordable.

While Apple has been a creating brand loyalty for the iPod, it is unclear how long this will last in the face of decreasing prices. Once your telephone can play gigabytes of music, would you still really want to have an iPod? You might think that Apple’s brand loyalty would keep people linked to their iPods; however, I predict that the future of the iPod will be very similar to the current situation of TiVo. When TiVo was created many people fell in love with it and fell in love with the TiVo brand. It allowed users to seamlessly “timeshift” their television viewing in a way that was far easier than traditional VCRs. Unfortunately for TiVo, this technology has become embedded in many digital video recorders (DVRs) that can be rented from a cable company for a mere $10 a month destroying much of TiVo’s business.

Apple has to be thinking about how convergence will affect it in the future. Is it thinking of making a cell phone or PDA? If it wants to stay in the portable electronics business it probably should.

Apple will continue to leverage its brand with continued innovation. This seems to be the path that Apple is on. The company appears to stay just ahead of the curve as music players continue to evolve. After the initial iPod, Apple introduced the mini which turned out to be an incredible hit. Later still it introduced the shuffle which quickly grabbed an impressive market share.

I am still not sure how the brand will affect Apple’s future. When I decided what personal audio player I wanted to buy I realized how strong Apple’s brand power is. A friend of mine asked me, “Aren’t their players that are better.” At this point, I don’t know if there are players that are any better but there are certainly players that are a better value. However, everyone who has these “value” players invariably looks like someone that is too cheap to buy a real iPod. Essentially, an iPod has become a status symbol. I was listening to the TWiT podcast and they mentioned that Apple’s branding campaign even goes as far as the earphones. No one knows what kind of player you have but everyone knows if you are listening to iPod headphones. However, this branding becomes more difficult once people see portable music players as a commodity device.

However, Apple may have already set a standard. At this point, the iPod has actually become a standard. Just search for iPod accessories on Amazon.com and you start to understand what I mean. There are many different ways to interface with an iPod. Essentially it’s become a platform to play music in your house, in your car, or even record your voice. The simple fact that there are so many accessories available for the iPod strengthens its monopoly power.

In the future, we will probably see Apple leverage its iPod monopoly to attack other markets. It is not likely that people will have iPods a decade from now. However, at this point, it looks like the iPod may dominate the market until audio players are usurped into some sort of other technology (like cell phones). Steve Jobs may already understand this and assume that the iPod will go away and the company will make most of its money from its iTunes Music Store. This might make some sense because the iTunes music store represents actual capital that people have invested. With 500 million songs downloaded, that means that people have invested $500 million in Apple protected music.

Therefore, Apple’s future strategy it might look like this. Apple realizes that the iPod is doing exceptionally well right now and has an enormous market share of the portable player market. At this point, Apple needs to figure out how to leverage that monopoly to attack other markets. Does it want to force every hardware manufacturer to use the iTunes Music Store? Is it using the iTunes Music Store as a first mover advantage into digital music?

Apple needs to figure out how it can make money off music in the future. I see three possibilities: through hardware sales, licensing technology or selling online music. I think hardware sales will be a hard business for Apple. At this point, not licensing its technology seems to have been good for apple. Many people have bought the iPod and those who want to buy music end up buying it from the iTunes Music Store. The only advantage to licensing it’s encoding technology is to make their encoding technology a standard (which due to the number of users has become a de facto standard). In the future though, online music is where Apple will probably make most of its money. That means that they want as many people as possible able to buy from the iTunes music store. If they want to make sure of that, why aren’t they licensing their technology as soon as possible.