Category Archives: distribution

Insured against ranting and rambling

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Moneyweb has an article describing the failure of the South African insurance industry to provide insurance to the wider population, including lower income markets such as the banking sector has done.

There are some interesting points to discuss here, and I’m certainly not saying the industry could not do more. However, there are some fairly fundamental social, pyschological and technical reasons that need to be overcome first. I’ve repeated some comments on the article below. I don’t claim this to be an exhaustive list, but I suggest that it lists some more likely suspects for the causes of imperfect penetration of the insurance market.

Sorry Felicity, but this article doesn’t even get into the details and shows a lack of understanding of the drivers of the need for insurance, and the perceived need for insurance.

Life Insurance
Comparing insurance to banking is disingenuous. Transactional banking makes your life easier, now. Basic savings account can work towards short-term goals. Life insurance will always seem less pressing.

1. Savings products will not work for lower income policyholders through an insurance policy because of the assumed average tax rate of 30%. It is a good deal for welathy investors in high marginal tax brackets, but awful for poor people. This is a function of the tax system not the insurers.
2. Life insurance requires payment of a premium now for a possible future benefit to dependents. There is no way this will ever be a priority need. This is human nature. Even if policies are sold, they will be lapsed very quickly and “better” uses are found for the premiums.
3. Lower income market segments typically have greater reliance on extended family for support. Thus, the need is lower for insurance. This is typical of developing countries, and declines as wealth and education increase (along with smaller families, later first children and less support from the extended family).

4. Funeral insurance may be sold through non-traditional outlets, but it is still exactly life insurance. Just that here the need is better appreciated and understood. Therefore it sells. Or do you want insurers to sell products for which there isn’t a need. (hey, easy on the comments that they already do… I don’t think insurers are angels!)
5. Credit life is required to protect the lenders from the death of the borrower. Again, there is a clear need and this form of insurance is quite widespread. Incidentally, funeral insurance and credit life are, unfortunately, typically quite profitable business lines. This might be a better line of attack against the insurance industry.
6. Insurance in South Africa has remarkably high penetration as measured by insurance premiums as a percentage of GDP and compared to other countries. This shows the succes of the industry, and also explains the limited growth prospects. Life insurance is typically less prevalent than short-term insurance in developing economies – if the problem isn’t restricted to South Africa maybe we should look for broader reasons?

7. I know several insurers who are targeting lower income markets with mixed success. The typical complaint against insurers is that they are overly profit-seeking. If (if!) this is true, then one can’t also complain that they aren’t following up on profitable opportunities? Again, maybe the reason is broader than you’ve implied.

Short-term insurance
Several other commentors have already described valid reasons for why short-term insurance take-up is lower than might be hoped. In many countries, third party liability cover is a legal requirement to drive a vehicle, and with good reason. This is the case in Lebanon, another country where I understand a bit about the insurance industry.

Losses on equity portfolios for our short-term insurers don’t really translate to a requirement to provide insurance to new markets. Maybe it suggests a requirement for less reliance on equity bull markets for performance in good years.

Short-term insurance in South Africa would be considered competitive by most standards. If there were large, profitable, untapped markets out there (with sufficient volumes, limited fraud and low enough claims frequencies and severities to make the premiums affordable to the target market) I expect they would be aggressively pursued. The thing about third party liability cover is that it isn’t greatly a function of the value of your vehicle. That makes it relatively expensive compared with the value of a car typical of a lower income target market. Being insured against someone else’s costs, when you would have no way to pay them otherwise and therefore it would be pointless to be sued, doesn’t sound like a very likely expenditure item.

The expenses of adminstering a policy are also not related to the size of policy or the value of insured property. One can argue whether current efficiency levels are right, but that is a separate argument (and one likely to suggest job cuts…).

The propotion of South Africans with short-term insurance should also be compared against those with sufficient assets to make it sensible. Direct comparisons against the populatio as a whole are close to meaninless.

Ok, I think I have done more than enough rambling and ranting. However, let me conclude with one observation on a quote from the article:

“And the plain fact is that local insurers have done way too little to develop products that offer value for the vast majority of South Africans. This is self-evident; precious few South Africans use insurance products.”

Just saying something is a fact doesn’t make it a fact. And please don’t abuse “self-evident”. Just because one item could be a cause of something does not make it the cause, or the only cause, or the primary cause. Especially not when you have just laid out a few of the reasons I also covered as to why insurance is a hard sell.

I wonder whether I should have mentioned the bad debts on house and car loans that are stacking up based (only partially!!) on pressure to lend to households with little wealth for large deposits and strained financials?

How not to do SEO

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Search Engine Optimisation (SEO) is an unfortunately necessary part of driving traffic to discover a website. Good content is necessary but not sufficient.

Why SEO is necessary

A large percentage of web traffic is directed by search engines. After all, this is how Google has become the giant company that it is. I tried to track down some hard statistics on this, but they varied widely and didn’t seem all that credible. Nevertheless I think it is clear that this traffic is signficant.

Search engines use algorithms and automated scripts (“spiders”) to understand the importance, quality, relevance and popularity of content on the web. A radiographer takes xrays without being able to see directly the same picture as the xray will produce. A photographer taking black-and-white photographs needs to ignore the colour in the viewfinder and imagine the light and shadows and shapes of the final photograph.

If your website has excellent content, but structures it in a way that is not readily accessible to a search engine’s spiders, then the spider will pass on by without sending humans to visit your site. Two easy examples may help:

  1. Flash content – the content may look great and be ground-breaking and useful, but since most spiders don’t currently “understand” Flash content, it will be ignored.
  2. Login, registration and forms – if large parts of a website are accessible only after filling information in a form or registering and logging in, the spiders won’t get in the door.

There are other considerations that are postulated to be relevant:

  • Duplicate content “dilutes” the scores of any individual page
  • Many links to irrelevant, poorly rated pages can suggest that your site is not providing useful info to the user. This effect is stronger since search engines try to separate “link farms” and rings and other methods to make a collection of websites appear more connected than they are in reality.
  • Poor choice of keywords that searchers may often use, or targeting terms that are widely targeted by a range of other websites.

A typical SEO strategy is quite complex and takes times, effort and money

A typical SEO strategy would cover analysing the target audience of a site, understanding the site content, understanding the site structure, doing keyword analysis, checking out competitors, generating a few good quality inbound links if applicable, possibly generating some linkbait content, installing appropriate tools (e.g. Google Analytics) to monitor traffic and then repeating the cycle once the customer behaviour is better understood. Key metrics are site traffic generated, low bounce rates, long time on the site, repeat customers, higher sales (or more contacts if online sales aren’t part of your service) and higher search rankings.

All of this takes time (both from the SEO but also from the website owner). There are many fly-by-night organisations claiming to do SEO with neither the knowledge or the business ethics to get it right. It is probably because it is a poorly understood, sometimes arcane speciality, that these companies get into business with low starting capital costs.

How not to do SEO in ten easy steps

I received an unsolicited email from Zenteq recently. I’m not providing a link to their website as I have no reason to believe they can deliver anything useful.

  1. Sending unsolicited email (aka SPAM). This is typically a bad idea. Best case scenario you get a few new customers. Worst case scenario you irritate a huge block of potential customers, have your mail server and/or IP blocked as a source of spam, have your ISP close down your website for abuse and so on.
  2. Use bright (as in reflective safety wear) green text and truly ugly formatting. Not a professional image by far.
  3. Offer to “SEO” the website by submitting to 600,000 search engines monthly. This is irrelevant and a giant waste of money.
  4. Charge R350 per month. In the short-term, this is far too little. The work involved at the outset of optimising a website for search engines requires several full days of work. However, in the long-run, this may well be too much. Since there appears to be no reason for the client to stay with Zenteq, we have a familiar problem where the business model doesn’t make sense for a serious operator and thus it’s likely that it isn’t a serious operator. (on trawling their webpage I see there is a R1000 upfront fee as well. Nice not to include this in the email. It still isn’t enough for serious upfront work)
  5. No description of other components of SEO strategy, or examples of prior successful work.
  6. “From” email is marketing@fire-equipment.org, “Reply to” is newheights70@telkomsa.net but the content directs the reader to info@zenteq.co.za. So which is it?
  7. Structure your email so that it gets stopped by the spam filter built into both Thunderbird and Apple’s Mail application.
  8. Include icons on their site claiming valid XHTML code, but then fail the test when the button is clicked.
  9. Analysis of google results shows no links to zenteq.co.za.
  10. And my favourite – a search on google for “seo site:za” which searches for the top websites relating to “seo” within the “za” domain doesn’t have zenteq listed in the top ten pages. A first-page listing is almost an requirement if you expect any number of click-throughs.

So who guards the guards, and who optimises the optimisers?

Economics of piracy at the limit

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I was reading the comments on a recent blogpost on the freakonomics blog. Someone suggested (tongue firmly in cheek, I hope) that if libraries were invented today, copyright enforcement bodies (the DMCA was labelled directly) would hunt down anyone who tried to set one up.

The comparison of the lending of books to the piracy of electronic media is disingenuous.

Why pirating books is a limited problem

Books are generally sold under the “licence” that allows them to be resold or loaned. Although there is arguably a different value/cost associated with a book purchased for a single reader versus one for a library, the scalability of a printed book is naturally limited. A physical book can only be read by a single person at a time, and transport and distribution are not costless.

The need for careful agreement between buyer and seller around what is allowed is not critical and probably not worth the cost of having separate licences to cover individual consumers versus libraries.

At the limit, pirating of electronic media implies no production

For electronic media, the scalability of copying and redistribution is, for most practical purposes, limitless if we assume perfect, universal, costless reproduction and distribution.  For impractical purposes (and pedants, you know who you are) there are limitations around the total population of earth, the market for that particular work, and costs of distribution are not zero. While I haven’t gone through the entire process of relaxing these assumptions to understand the impact, this theoretical framework is still instructive.

Thus, without careful agreement between buyer and seller, buyers will be inclined to extract maximum value. Taken to the extreme, this implies that only one copy of the work will be bought. I’ll explain how we get to this now. In the rest of this example, I am assuming no restrictions on copying, which includes no social pressure or stigma attached with using or distributing pirated media.

Once there are two sellers in the market, the market price will be pushed down due to competition between the two sellers. If one seller wants to sell the product at any price above zero, the competition will undercut that price since profit can still be made until the price hits zero. The aggregate supply curve is effectively horizontal at a price of zero since the marginal costs of production are zero.

In this analysis I am implicitly assuming that perfect competition will result even when there are only two suppliers in the market. Ordinarily this would be a poor model for this type of market. However, for two reasons, this is probably a good first order approximation:

  1. The “goods” being supplied, the creative work in this case, are exactly identical in every way. The differences or perceived differences of monopolistic competition and other market forms do not apply.
  2. Every additional buyer instantly becomes a potential supplier. Thus, the number of suppliers in the market grows exponentially by doubling every “turn” of the process. It should be relatively clear that the market will inevitably fall into perfect competition in a relatively short amount of time.

With a typical downward sloping market demand curve, this implies that an infinite amount of the product will be “sold” at a “price” of zero. This is approximated through current distribution and pricing of pirated media.

The creator of the work knows that he or she will only ever be able to make one sale (where I define “sale” to be a transaction with a positive price). All future sales will have zero total revenue. So the price at which that first sale is transacted must be very high if it is to be worthwhile to the creator to produce. However, the first purchaser knows that once he or she has purchased the work, competitive forces mean that he or she will not be able to sell the work for more than 0 in future. Thus, the price paid by the first purchaser will only be equal to the consumptive value to that purchaser.

Any creative work that will cost more to the creator to create than the value that one purchaser places on it (albeit the purchaser who values the item most) will not be created. Not for commercial reasons anyway.

Conclusion?

I am wary to conclude too strongly on an area that is new to me and where I haven’t necessarily thought through all the consequences, or understood the impact of relaxing certain assumptions. However, this little thought experiment naively suggest that, under these strict assumptions, a huge variety of creative works may never see the light of day.

The start of a practical solution

Live concerts cannot be perfectly replicated. If one assumes that a large portion of the value derived from a live performance (or live “creation”) is being there in person, then that “first sale” can be made to many consumers simultaneously. That same instance of creation cannot be resold since a live performance cannot be stored. However, a second, third and Nth live performance could be sold where the creator has pricing power due to the natural monopoly created through their own talent, brand and creative abilities.

Several performers (including Madonna) have signed huge financial deals with concert promoters (e.g. Live Nation, suggesting that the real world is already tackling the changing economics of artistic creation in an electronic media world.

This is unlikely to be the only solution that is tested, but it will be interesting to see how this section of the economy develops through this testing phase.

In this post I haven’t expressed an idealogical view on whether piracy is “good” or “bad” according to some normative standard. The hope is that we can follow the logical, economic arguments to their conclusion rather than be sidetracked by emotion and politics.

5 Mistakes you make when you leave the science out of marketing

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Marketing is naively thought to be mostly art and very little science. While it is true that there is are elements of inspiration and creativity and passion involved, the balance of an effective strategic marketing role is heavily in favour of science.

As a further point to consider, I put forward the proposition that much of really great science involves inspiration and creativity in passion in more than equal measures to a successful marketing decision. Newton’s development of the laws of motion and gravity, Copernicus’ solar-centered world, Pasteur’s painstaking experiments to support and understand germ theory are all well known examples of brilliance and flair combined with method and rigour.

But where does science contribute to marketing? Is it possible to reap the benefits of logic and analysis and rigour without damaging the creative process?

The answer is “absolutely without a doubt” for numerous reasons. I will touch on just one in the next few paragraphs to demonstrate the idea.

Introducing analytics

The most commonly thought of analytics when it comes to marketing is customer analytics. Better understanding of customer behaviour, preferences and ultimately buying decisions is enormously valuable. Take what was done in the past, compare the success rates of the different initatives, and stop doing the ones that don’t work.

Any organisation can benefit from understanding what works and what doesn’t, and shifting resources to those functions that work. Good organisations also understand the value of play and experimentation, and will continue to allow an element of trial and error. Truly excellent organisations combine experimentation with analytics to truly understand on a measurable level which experiments work and which should be tossed.

A real life example of the place of analytics

Let’s consider a very specific example. An old university friend of mine has started a new venture with a unique offering that clearly means a great deal to him. He has the passion, and presumably the product, to make his idea a success. He also had the good sense to plug into social networking platforms such as Facebook to spread the word of his new website and associated content. So far we have an excellent platform for success.

Mistake #1: Ignoring pre-existing science and analytical results

However, the design of the website appears to have been performed without understanding the hard, measurable evidence from a range of pre-existing studies and material. The website makes it difficult to buy. A long slide-show intro precedes access to the main page, frustrating regular visitors to the page (the intro cannot be skipped) and severaly damaging the ability of his site to be spidered and highly ranked by search engines.

So several mistakes have been made by disregarding the clear evidence that has been accumulated through analysing customer behaviour on similar projects.

Mistakes #2: Not performing analytics on web page at the outset

An excellent first step in understanding how customers will interact with your sales channel is to watch customers interact with your sales channel. Before a site goes live, invite some representatives from your target market (friends and family will do in a pinch if budget is tight, as long as you are confident they will give honest feedback).

Watch them interact with your website (or other sales and information channel). Where are they confused? Do they ask many questions? You won’t be there in person for most of your customers. What do they say is good, what do they say is ugly. If one guinea pig says something doesn’t work, that could be personal preference. If all 3 or 4 give similar feedback, the scientific evidence is mounting and a wise marketer would make changes.

This can be a very quick and easy, but amazingly valuable way to understand the strengths and weaknesses of your approach. Don’t assume you are just like your customers.

Mistakes #4: Not starting to collect analytics and data from the start

It is so easy to collect useful information, if you plan it in from the start. Once the system is set up and the process is working, invaluable information will flow with every visit, every call, every surf and every purchaser.

Not setting up to collect data is usually the first sign that the marketer doesn’t understand the value of understanding the customer.

Mistake #5: Thinking science cheapens the experience

Perhaps this should be mistake #1. Many people with great ideas feel that their ideas should sell on their own merit. They view logical, analytical understanding of customers to be beneath them. If the product is good, if customers will benefit from purchasing the good or service from you, then you owe it to them to make it as easy as possible for as many as possible of them to effortlessly find their way from oblivious potential customer to satisfied repeat customer.

If your aim is to build the perfect mousetrap, perhaps it is worth finding out what customers want in a mousetrap, where they like to buy it and how they like to buy it.