Monday, May 31, 2010

Gotcha ... a big part of modern business strategy

Dear Colleagues

The idea of "buyer beware" was one of the first things I remember from my childhood ... and I remember all sorts of little stories about how the business seller tricked the consumer. One memory is about the upcoming annual post Christmas "sale". My mother saw something we needed but decided that she would wait until the "sale". When she got to the "sale" she found the same item now on "sale" at a price that was higher than it had been in the regular course of business. The "reduced from" part of the tag was pure fiction.

I have watched with interest over the years the way similar looking packages contain less and less actual product. It is a long time since a "One pound" package of coffee actually contained one pound or 16 ounces ... now it is likely to contain something more like 10.5 ounces! It is a long time since a half pound bar of chocolate was 8 ounces ... now something that looks somewhat similar contains 6 ounces if you are lucky and maybe just 5.5 ounces. One big baking company changed the size of its loaf of bread from 24 ounces to 16 ounces announcing new price new size ... but price per unit of weight went up in the process.

The "gotcha" idea is everywhere. I am a member of AAA (the American Automobile Association) which provides its members with free service when there is some sort of breakdown. The basic service is excellent, up to a point ... but the "gotcha" element is in full play. Their roadside service is provided by garages ... automobile service centers ... that know every trick in the book to convert the roadside service into a high revenue business lead. I have recently been subjected to this abuse and what should have been a "free" jump start to get me mobile again turned into a chain of misinformation that nearly landed me with a towing and repair bill approaching $1,000. The assumption that the customer is a total dummy works most of the time ... and it is a very profitable business model. The fiasco cost me a lot of time and aggravation, which in itself is a consumption of value!

The sub-prime mortgage industry and the boom in housing construction was a "gotcha" business. There were many parts of the value chain that were able to make good profits as long as the "reality" of the business was hidden from view. A lot of people including Main Street bankers, real estate agents, appraisers, attorneys, builders, sub-contractors all made money profit ... but in due course the music stopped and the mess had to be cleaned up. The cleaner of last resort is the "government" which is shorthand for the general public and taxpayers who end up with the bill! A host of people made a lot of money out of the sub-prime fiasco ... and all those that tried to "whistle blow" were themselves blown away!

There is a "gotcha" element in all sorts of pricing programs. The printer ink industry is a great gotcha game. Buy a printer for almost no money ... and regret it as long as you use the printer and have to buy exorbitantly expensive ink.

The mobile phone pricing has a lot of "gotcha" ... the contract terms are driven not only by what you think you have agreed to, but also all the small print that is carried along with the highlighted good part of the deal. The demographics of modern mobile phone users is perfect for "gotcha" billing, since many of the users get their bills paid by parents who are intimidated by their children and corporate contracts and legalese!

The medical sector is also into the "gotcha" business model. Maybe it is the most egregious of all the "gotcha" business models. A loved one is sick ... and relatives take the sick person to the hospital. The question is posed "What to you want us to do?" and the only possible answer is "Everything". This is "gotcha" at its best! The relatives are answering in the right way ... but they are usually neither lawyers nor health professionals. By doing what is right ... the relatives are likely to be on the hook for a whole lot of costs that may or may not be justified ... but who is to ever know! I went through this a long time ago at a hospital in Trenton, New Jersey with my visiting Father-in-Law. It was a wake up call ... just one in a series of "gotcha" events throughout my career!

There is "gotcha" in the charity sector. Sad stories about poverty and children are used to mobilize donations ... but sadly the money donated never seems to be linked to much progress out of poverty and much reduction in the number of children suffering. There are good stories about success ... but not all the money donated is going to do much of substance. As things now stand with lack of accounting and accountability, nobody will ever really know how much of these donated funds is merely "gotcha" at its worst.

There is "gotcha" all over the relief and development industry. Because there is so little rigor in the accounting and no accountability it is easy to call something one thing, and have it actually behave in a totally different way. At one time agricultural cooperatives were a fashionable modality within agricultural projects funded by the World Bank ... but looking at the accounting in these cooperatives it was able to see how they actually functioned as vehicles to divert funds to powerful people and their business interests. It was "gotcha" at its best ... because while the accounting showed the reality very clearly, all the decision makers associated with the project wanted success, and having the cooperatives exposed as a fraud would be detrimental to all these people's reputation and career. Not surprisingly, the accounting was ignored ... the responsible World Bank staff moved on with their career track record unblemished! Government official in charge of the project funds continued with their rip-off as if nothing had happened. My consulting team never got paid ... the Government would not sign off on the work we had done ... the World Bank would not pay because the Government had not signed off! (See note below)

The "gotcha" economy is unhealthy ... even though there are profits being made, the slow build-up of anger about how business is behaving is going to produce backlash, and it could be vicious. People will put up with a lot ... but at some point people snap. The fact of several decades of bigger profits and bigger fortunes while there is also a bigger pool of people who are struggling to make ends meet ... or just simply now failing to make ends meet. I have never liked the "gotcha" business model ... but it is only recently that I realized how pervasive it is, and how damaging to society.

Peter Burgess

[Note ... In some ways I had the last laugh. Two years after this experience the World Bank realized that they had been duped on almost all their projects in this country. This country became one of only two countries in the World where the World Bank withdrew its relationship.]

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