The Verizon Wireless “Convenience Fee” and the End of Capitalism as We Know It

January 1, 2012 § 9 Comments

The concept first hit my radar when the “profit challenged” airlines decided to offset their personnel costs by imposing baggage fees, charging up to $50 to stow and deliver them.  Travelers complained, and the media had a field day – how dare they charge us!  Airlines held their ground (with the exception of Southwest, which never initiated the fees), and after the latest wave of bankruptcies, the charges have contributed to the restoration of industry profitability.  Then several banks (particularly the large, publically traded ones) announced that, in response to new regulations that restrict the profit they can make on electronic transactions, they would levy new monthly fees on debit cards.  Never mind that customers always had the option to do their banking elsewhere, including many community banks and credit unions.  The well-intentioned media and special interests came to the consumers’ aid once again, and rather than continue to face the negative publicity onslaught, most, if not all of the banks, relented.  No profit for you!

And now this.  Three days ago, Verizon Wireless (VZW) disclosed that customers who chose several bill payment methods (including phone and Internet) would be assessed a $2 “convenience fee” per transaction.  Customers who chose alternative channels (such as snail mail or online bank bill pay), or who signed up for VZW’s auto-pay feature, would avoid the fee.  But within hours, the media and special interests arrived on the scene again; this time joined by the FCC, which threatened an investigation.  And like the banks, VZW relented within hours.  What if VZW had simply discontinued its higher cost payment options – would it have faced the same ire?

So what’s the message here?  Are companies supposed to feel ashamed or immoral for making a profit, or for increasing them, by charging a fare rate for the services they provide?  In a competitive, capitalist market, is it not necessary to continuously innovate and to seek new ways to improve the amount and quality of the services they provide, and as these enhancements contribute their cost basis, are they not entitled to pass along these costs to their customers who are willing to pay?  After all, these are for-profit enterprises, aren’t they?  And — rhetorical question alert — don’t customers always have alternatives to paying these fees, including:

  • Comply with the conditions for “free” (such as with VZW’s free bill payment options)
  • Switch to a different provider
  • Stop using the service

What, suddenly it’s our right as citizens to have wireless service, and even more so, wireless service without extra service fees?  Since when is profitability such a problem?  For those who cling to the “greater good” argument, how would they respond to VZW’s (and all companies’) lesser ability to hire new workers without continuous profit growth?  I’m sure my assumptions are flawed, but for simply math, let’s assume 20% of VZW’s 100M customers use one of the implicated bill payment channels, and that VZW makes as much operating profit on the “convenience” fee as Verizon does overall.  On that basis, VZW could afford to hire an incremental 1,800 employees earning the median U.S. household salary, on a fully loaded basis.  If these employees helped create more growth for the company, VZW could hire even more.

Don’t get me wrong – I have no problem with consumers in a competitive, free market taking their business elsewhere, or in the case of Verizon, avoiding fees all together by complying with any of the company’s free options.  But when advocacy groups, the media, and regulators pile on together, and create the impression that the company has attempted some moral misdeed, well, that’s where I draw the line.  Come to think of it, I’m not even clear to what extent the customers themselves were even bothered by VZW’s fee — with all the noise coming from other, more organized groups, we never even got the chance to hear from them directly (other than a certain number of Tweets from some of the more vocal among them).  With only hours between the announcement and reversal of the fee, I’m not convinced the average VZW customer even had a chance to learn about it, let alone to consider how they felt about it!

Look, I know my rant may be unpopular.  I’m all for consumers making their preferences known, and even better, taking action with their wallets.  In a competitive market, this works especially well, and we have several layers of government and special interests to ensure competitiveness.  But when a business in a competitive market is vilified for imposing fees, especially when it gives customers a free alternative, I just don’t get it.  Healthy, growing businesses hire people, give raises, and pay taxes.  Isn’t that important too?

Taken to the extreme, I can see this slippery slope gaining momentum, and before you know it, our economic machine could edge its way closer to the European model, with heavier regulation and less commercial fluidity.  Even if this doesn’t occur through formal methods, it could happen through PR pressure applied by special interests or individuals in high places with “an axe to grind”.  But with many Euro Zone economies presently at risk of default, it’s hard to make the argument that their model is more desirable.  I’m happy sticking with good ol’ fashioned, American capitalism, if you please.

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§ 9 Responses to The Verizon Wireless “Convenience Fee” and the End of Capitalism as We Know It

  • mikeschinkel says:

    If this is the “End of Capitalism as We Know It” I will be the first one to raise a glass in toast.

    The problem is not consumer advocacy groups or the media as you state, that’s simply the symptom, the smoking gun, the canary in the coal mine.

    This crux of the problem is that too many companies have stopping thinking about how to delight the customer and have instead focused their attentions on maximizing shareholder value. These companies, like Verizon, most Airlines and especially the banks view customers as a necessary evil. They have ignored Peter Drucker’s foundational insight of 1973 that “the only valid purpose of a company is to create a customer.”

    Too many companies today view customers as a pawn in achieving their goal of serving their shareholders. They treat their customers with contempt and actively look for way to extract more value from each customer without giving anything back to them rather than looking for ways to delight their customers so their customers will happily pay them more.

    Consider this: do you think that the media or advocacy groups would have much success bashing Apple? How about Zappos? What about BMW? Or Ducati? Or Nordstroms? Or even Southwest, which you explicitly referenced? No they wouldn’t, because these companies focus on delighting their customer with the idea that profit and shareholder value follows. As these companies have proven, success follows those with a delighted customer based as most of them charge a lot more than their competitors.

    Of course the entire current US financial system and laws focus CEOs on shareholder concerns vs. customer concerns (and this excellent article from Forbe gives a lot more information about the issues: http://www.forbes.com/sites/stevedenning/2011/11/28/maximizing-shareholder-value-the-dumbest-idea-in-the-world/.) Thus a CEO that focuses on customers is really swimming upstream so few do it. No wonder advocacy groups and the media are so upset with our current crop of companies.

    Rather than decry there’s an inequity with advocacy groups and media as companies focus on delighting themselves instead of their customers, maybe we should look inward and realize that we as a culture have done this to ourselves. It’s not capitalism that is on attack, it’s capitalism gone bad.

    So I for one am anxious to see the end of capitalism as we know it, in hopes that we can get back to the capitalism that we once knew.

    • Mike, thanks for your very thoughtful comments. We’re actually in agreement more than you may realize, and I support the idea that companies must “delight” customers to thrive. My argument is that it’s possible [read: necessary] to simultaneously charge for services and be a great, customer-centric company. Consider Netflix, which was atop the heap in customer satisfaction, and at the same time, burning through its cash. When it modified its model to improve its viability, it quickly fell from grace. Granted, Netflix may have taken its changes too far, but it’s an interesting case study to illustrate how fragile (and important) customer-centricity is. Even the mighy Apple isn’t immune. They are continuously criticized for product issues (faulty internal antennae, fragile phone casings, upgrade costs, poor calendaring software, disappointing releases [4S vs. 5] …), but do a nice job of listening to their customers and responding, as did Verizon, I thought. But it concerns me when a company offers a variety of options for bill payment — the most common of which are free — and its decision to charge a $2/mo fee to offset the cost of two of these options becomes a top media story of the day, if not the #1 story.

      • Ah, Netflix and Apple. I almost didn’t include Apple but did because they have mostly gotten things right (though I’m by no means one of their acolytes.) Netflix is a different case. Netflix delighted customers and then was completely ham-fisted in how it handled the changes. NetFlix could have handled that sooo much better.

        I think this is ultimately a “Who Moved My Cheese” problem where people get upset when things they took for granted are taken away. And the irony of this its true for both the consumers AND the businesses in this case.

        On the consumers side people get used to an offering and are upset with price increases w/o new benefits. In some cases people are okay with this, especially if the expense is transparent and they know their involved directly effects real people. But when consumes see a faceless company raising prices they have no idea that those price increases are “legitimate”; their payments go in a black box and then it’s reported that the “struggling” company with “high costs” had record profits:

        http://financial-report.info/verizon-with-profit-increase-in-q3-2011/

        It’s really hard for consumers to have any empathy for the “struggles” of a company that sees record profits while many consumers are struggling just to make ends meet.

        But I’ll contend if Verizon had asked itself “How can we address this expense in a manner that will delight our customers” they’d not have an issue. Imagine offering a more convenient payment service via a smartphone app which they promoting at every customer payment touch point. Surely the increase in revenue from more smartphone use which often doubles a bitl would generate more than a $2 fee.

        However, ON THE BUSINESS SIDE people running larger companies are upset because THEY have had THEIR cheese moved.

        For most of the past century and especially the past 25 years businesses that have managed to gain dominent market share as part of a duopoloy, triopoly or quadropoly in their industry have had the ability to dictate terms to consumers when switching “costs” are high enough, which is true for banks and telecom, or when availability is limited; often true for given airline flights. Consumers have always been upset about how these companies treated them but consumers have never had the power to do anything about it. And those business’ people have become accustomed to taking their customer’s individual lack of power in the buy-sell relationship for granted. But with social media all that has changed; individuals can now easily and inexpensively become a collective, and as a collective they are no longer impotent in their concerns.

        No wonder large businesses are upset; the balance of power has shifted!

        Collectively people know inequities when they see them, and when those inequities go on too long and are too eggregious you have an uprising. What happened to Qaddafi and Mubarak is now happening to U.S. corporations and they should really take note as to why people are upset and address the issues before negative sentiment explodes as it did during the Arab Spring. Interesting to see that Saleh of Yemen saw the writing on the wall and took action before they strung him up like the others.

        But if we pull back and take a look at what’s causing the most consternation it is seemingly arbitrary increases in fees for the same service that was previously less expensive or free. Let’s look at the examples:

        – NetFlix practically doubled it’s fees and took things away at the same time.
        – Bank of America tried a fee for using Debit Cards.
        – Verizon tried to charge a fee for making individual payments.
        – The Airlines are charging numerous extra fees, especially for baggage.

        Looks like there’s a pattern here. What’s the moral of the story here? Just don’t arbitrarily add a new fee, innovate instead! Create new offerings that customers WANT to pay you extra for, simple as that. Of course if it’s publicly known your business is struggling then okay add some extra fees and ask the public for forgiveness. But DON’T tack on fees when you’ve had record profits. No WONDER people are upset.

        So is this the end of capitalism? Nah, it’s just an adjustment like so many that happened throughout history. Case-in-point, I just spent $250 on a Nest thermostat, and I love it! $250. It’s a thermostat ferchrissakes! Why would I pay that? Because it gave me something really innovative and addressed real issues that nobody else has addressed. With technology and social media today any size companies has an unprecedented ability to innovate and reach the market for those innovation, it only takes a committment to be innovative.

        On the contrary, I think capitalism is experiencing a renaissance. Companies that embrace a constant innovation and a focus on delighting the customer will thrive and grow capitalism. However, those who choose to ignore the writing winds of change will wither and die. The only constant is change, or in this case ongoing renewal.

        But that’s JMTCW. 🙂

        Thanks, I’ve enjoying the debate.

  • mikeschinkel says:

    Oh, I forget to reference IBM, a company that has exceeded investor expectations over the past decade but first focusing on their customers:

    http://www.nytimes.com/2012/01/01/business/how-samuel-palmisano-of-ibm-stayed-a-step-ahead-unboxed.html

    In part IBM has done it by jettisoning profitable business where there was not much innovation left and instead focusing on areas where they could innovate. Contrast that with HP which took that opposite approach but is now struggling. How many other big companies are willing to do the same?

  • Joeventures says:

    I stopped reading this right in the middle because, if you think about it, the answers to your questions should be obvious.

    Working backwards…

    “Don’t customers always have alternatives to paying these fees?” You think it’s a rhetorical question, but there is an answer: not always. There are not really that many companies in the marketplace. If you go back to your basic economic theories (which most people don’t realize how nuanced they are), remember that a sufficient number of competitors must exist for sufficient alternatives to exist. When market equilibrium is achieved, it means *both* consumer and producer profit are maximized. A shrinking number of producers tilts the market toward higher producer profits and lower consumer profits. To offset the imbalance, other forces (whether government or media or some other group) must step in.

    After all, these are for-profit enterprises, aren’t they? Yes. So what? The goal for for-profit enterprises is to maximize net income. A variety of factors contributes to this bottom line. Don’t forget that customers, as a whole, are part of that mix. Or should these enterprises not care about their customers? Maybe that’s what you’re arguing here?

    “In a competitive, capitalist market, is it not necessary to continuously innovate blah blah blah…” Yes. But in the cases you cited, there was no innovation. These fees were getting tacked on to existing services that they previously offered for free. That’s about as close to a bait and switch as you can get without crossing lines of legality. (And that’s not taking into account those VZW customers who signed those famous two-year contracts.)

    “… are they not entitled to pass along these costs to their customers who are willing to pay?” First, you’re assuming the customers are willing to pay. Let’s leave that one alone. The tens of thousands of customers who flooded VZW’s phone lines spoke well enough on that assumption. Second, companies are entitled to charge whatever prices they like, so long as those pricing strategies don’t break the law. But in a truly competitive marketplace, smart companies would not dare raise prices simply because costs have increased. In a truly competitive marketplace, a company would raise its prices and justify it with an increased value proposition for its customers. For whatever reason, large companies (especially those that exist in marketplaces with very little competition) tend to forget the importance of the value proposition in pricing strategy.

    “Are companies supposed to feel ashamed or immoral for making a profit, or for increasing them, by charging a [fair] rate for the services they provide?” See above. They made poor decisions, and the consumers affected by those decisions do not have sufficient alternatives.

    “So what’s the message here?” That a healthy economy depends on truly competitive markets, which is a different concept than “free” markets. That a healthy economy also depends on the free flow of information, and that news media and advocacy groups play a role in that information flow.

    Other nuggets:

    “On that basis, VZW could afford to hire an incremental 1,800 employees earning the median U.S. household salary, on a fully loaded basis.” But they wouldn’t hire more people for its own sake. Large companies like VZW may be incredibly misguided in feeling entitled to make lopsided value propositions, but they’re certainly not stupid enough to hire new employees just for its own sake.

    “That whole last paragraph…” Painting the whole Euro Zone with a pretty broad brushstroke, I see. Not all the countries within the zone are faring so poorly. But, hey… the argument is a good springboard from which some Europeans could make the same argument about America. Given the weakness of our regulatory apparatus, I would think, say, the Germans (just as one example of at least a few) would rather keep their model than adopt ours.

    If we’re really concerned about shrinking job numbers, it makes a lot of sense for consumers to stir up these sorts of backlashes against new fees for existing services. When consumers to have those incremental dollars to spend on other products and services (especially, you know, the innovative products and services), then companies will have to increase their capacities (i.e., job creation) to meet demand.

    • Joe, thanks for your counter points. In response to a few …

      I agree with your admonition that not all customers have valid choices, but I was very careful to focus my comments on the dynamics of a competitive market, and in the case of VZW, customers did have a choice. They had the choice to use any of the free bill payment options (most of which, I believe, are more popular than the controversial ones), and they also had the choice to leave the company entirely for any of the other national or regional brands that serve their market (AT&T, Sprint, T-mobile, Cspire, MetroPCS, etc.).

      I think you raise a great point on the convenience fee not offsetting a costly innovation, but rather, a seemingly arbitrary incremental charge. But what if VZW’s business analysts realized the payment channels were more costly than they originally thought? Or wanted to encourage adoption of auto-pay? What if they just terminated the payment channels all together? Sometimes course correction is necessary, but I do agree with you that the preference would have been to pair increased charges with increased service.

      I don’t agree with your argument that cheaper service will spark increased demand (and therefore hiring), in this case. An extra $2 per month isn’t a meaningful amount in isolation, but collectively, could be worth half a billion in revenue to VZW, helping to fund incremental product development, improved service, and/or hiring.

      In any case, the communication channels provided by the social web inform and empower consumers like never before. And I applaud that. Big time. But we can neither afford commercialism nor consumerism to falter. Businesses must navigate the most competitive, demanding environment in history to continue to grow profitably (we can all name once high-flying companies that failed), and well informed consumers must continue to demand great products and services for fair prices. So let’s not be haters every time a company attempts to balance the interests of its many constituencies, including its customers, employees, regulators, environmentalists, vendors, partners, and yes, investors.

      • Joeventures says:

        “I don’t agree with your argument that cheaper service will spark increased demand (and therefore hiring), in this case.” That’s not my argument at all. I’m not sure exactly where I was arguing specifically for cheaper service. Though considering Verizon’s reputation of offering more expensive service than its competitors, that might not be such a bad idea 🙂

        My argument was that Verizon should not have attempted to charge the extra fee. To offer one package, then charge customers extra later on for using that package pretty well meets the definition of a bait-and-switch. To justify it by claiming the fee is selective is not really relevant.

        Had the company instituted that fee only for new customers, the fee would not have been as big a deal. But put enough heads together, and somewhere it’s inevitable that a consensus will form around justification of bad behavior.

        In any case, I think the real issue in the case of VZW has to do with the arrogance of the whole move. The justification you offered only demonstrates Mike’s argument.

  • mikeschinkel says:

    Just wanted to comment on what great points that Joe made in his arguments.

    Andrew, Want to know something interesting? I tweeted your post, Joe commented, and later that day we decided to have dinner in part to discuss our points. Who knows, maybe the three of us should get together for dinner, then we could really have an interesting conversation. 🙂

    • That IS interesting – thanks for sharing, Mike. It’s not important that people always agree, but that they can discuss differences civilly, and maybe even gain some additional perspective from the experience. I’m thrilled to hear that you and Joe got together!

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