From the Knowledge@Wharton today blog.

Technology has altered consumer product marketing from a top-down, somewhat paternalistic enterprise to an immediate experience that has more in common with a door-to-door salesman. Within the last decade, hordes of middlemen or third-party distributors have been obliterated from corporate flow charts. Instead, major manufacturers are hearing their products praised and castigated directly from consumers. And many of those consumers have a potentially powerful and infinite network of “friends.”

Measuring and managing that constant flow of feedback is the greatest challenge facing modern marketing managers, according to Peter Fader, a Wharton marketing professor and co-director of the school’s Customer Analytics Initiative. Fader moderated a panel discussion on the topic at the recent Wharton Marketing Conference.

Within the 90-minute discussion, six experts from leading consumer products companies described technology in general and social media in particular in a variety of ways, ranging from gift to burden. They toyed with words like “enabler,” “channel, partner,” “buzz meter,” “tsunami of data” and “problem generator.” One panelist hailed digital technology as a teaching moment because companies that monitor the web may uncover misinformation about their products and respond.

“There’s way more data now, and it’s a lot more work. Those days of meeting once a year to launch a single marketing campaign are over,” said Ryu Yokoi, senior brand manager for Unilever, a multinational company with headquarters in Rotterdam and London. “On the other hand, the feedback is very tangible and a lot more fun.”

A self-described “pop culture junkie,” Yokoi begins his day scanning the digital landscape for innovative promotions from Amazon to Living Social, and for online chatter about Lipton Tea, his major responsibility for the company. Other Unilever brands include Hellmann’s, Dove, Breyers, Ben & Jerry’s, Skippy and Vaseline. “The one place I don’t want to see our name is the “Condescending Corporate Brand” page on Facebook, [which] rips companies for posting what they consider dumb and insulting content on their Facebook pages.”

Frequently characterized as the word-of-mouth platform, Facebook is a critical tool, but not the only tool for getting out a marketing message on social media, noted Janis Fratamico, director of client experience for IBM Global Client Centers. “The truth is a lot of these Facebook pages have no value. It’s easy to be overwhelmed by the quantity and we recognize that we are not effectively using all the social media that is out there already.”

According to Amy Saunders, director of Johnson & Johnson’s digital center of excellence, the New Brunswick, N.J.-based company uses everything from old-style marketing, such as putting promotions on hospital maternity ward TV networks, to new media-influenced strategies, like analyzing skin problems based emailed photos from consumers.

As online buying continues to grow, so does showrooming, a trend in which consumers shop around at retail stores to examine products and pick the brains of sales clerks before actually buying from an online source offering cheaper prices. “It is a concern because we don’t want to be competition for our retailers,” noted Saunders, who has crafted multi-channel marketing strategies for J&J brands including Neutrogena, Aveeno, Listerine, Visine and Zyrtec.

Her concerns were echoed by Jeremiah Marble, a product manager for Microsoft. ”People want to touch a new phone and experience it in a tangible way,” he said. “Striking that balance between virtual and real customer contact is a challenge.”

Jeff Bedard, marketing director for Chase Sapphire, shared an anecdote that revealed the potential hazards for marketers from an annoyed customer with time to burn and a smartphone in his or her hand. Chase Sapphire is the credit card division of New York-based JPMorgan Chase.

A customer, he recalled, was annoyed with the long line ahead of her at a Chase bank branch. She grabbed her phone and began trashing the bank’s service in a tweet. A Chase social media monitor responded immediately to the tweet and asked if he could help her transact her business online instead of waiting for a teller.

While Chase Sapphire strives to be cutting edge in a competitive business, Bedard calls new technology “a gift to marketers,” but inevitably problematic. “The challenge is to uncover those problems and solve them before they get out of hand,” he said.

Technology can introduce moral dilemmas as well, noted Avi Mannis, vice president of marketing for Hawaiian Airlines. To illustrate, he proposed a common scenario in his business: lost luggage. “Do we go out of our way to help the customer with thousands of Twitter followers or the person who has none?” he asked. “Sometimes, technology can be a burden.”

This post was previously posted in Knowledge@Wharton today blog: Navigating the Multi-channel World of Modern Marketing

From the Knowledge@Wharton today blog.

Last week, Facebook announced that it was stepping up its efforts in the job search and recruitment arena by offering a new app that allows users to peruse employment opportunities aggregated from existing job boards such as Monster, Jobvite and BranchOut. Although Facebook is already viewed as an active but informal platform for job seekers who want to network, the company’s “Social Jobs” app will allow users to search approximately 1.7 million jobs by keyword and location, and then apply for positions without leaving the site. Facebook users can also share open positions with others in their networks by “liking” those jobs. The app is the culmination of a yearlong partnership with government agencies and human resources consortia, including the U.S. Department of Labor and the Direct Employers Association.

What does this new development mean for Facebook, its users and major players in the job search market, such as LinkedIn? K@W Today asked Wharton marketing professor Pinar Yildirim and Wharton emeritus management professor Lawrence G. Hrebiniak for their take.

K@W Today: Strategy-wise, is this a good move for Facebook?

Pinar Yildirim: Since its IPO, Facebook has been feeling the pressure to make business moves that will bring in quick money for its shareholders. This pressure results in some moves with short-term benefits but long-term costs.

Facebook started out as a social platform for a homogenous clientele. It had college students who shared similar interests and lifestyles. Users on Facebook felt comfortable sharing information and networking with close friends. It allowed for an easy and time-efficient way of keeping in touch. As Facebook gradually got larger and larger, the average user started adding her boss, parents, colleagues, neighbors or the random stranger she met at a party to her network. Her network was no longer homogenous. The quality of information shared among friends also went down significantly. Overall, users started to share less and less personal and intimate information.

Trading in quality of information for volume was a mistake, because the archive of personal information is the biggest value of Facebook to advertisers. Imagine what an opportunity it provides when a consumer shares personal information; [an advertiser is] able to target a consumer as soon as she shares information on everyday events — like where she is going out that night, what TV show she is hooked on, etc. — or life events like getting engaged, becoming pregnant, breaking up with a boyfriend and so on. Yes, Facebook added features like lists and friend groups to prevent the quality of information shared from going down, but let’s be honest: The average consumer is lazy, busy and not keeping up to date with settings on every website she uses. Most people would rather post less private information than spend hours creating lists of friends.

Facebook missed an opportunity and has been seeing disappointing advertising numbers. As a result, it is now turning to other options. Social jobs is one of them. Integrating ads into feeds is another attempt. I expect many others to follow.

In the short term, the Social Jobs app might help Facebook raise money as corporations will pay for posting jobs on Facebook, particularly given the unemployment numbers. Many firms are interested in getting personal information on a candidate. But in the long term, this move is likely to further degrade the quality of information people share. Users will be more careful about what they say or post on Facebook, because it might be evaluated by a potential employer one day. And this might further hurt the advertising dollars.

In summary, it is a good short-term move, but likely to have negative consequences on advertising in the long term.

Lawrence G. Hrebiniak: The Social Jobs app is a good strategic move by Facebook…. Facebook has a massive user base, and the Social Jobs app allows it to build on its people-reaching capabilities and grow in an area in which the company currently has a minor presence. This clearly is a strategic move [for Facebook] to test its mettle against LinkedIn, and the targeted company shouldn’t take Facebook’s actions lightly.

K@W Today: What will this mean for LinkedIn?

Hrebiniak: LinkedIn’s Talent Solutions unit is its bread-and-butter, revenue-producing division, and Facebook would like a big bite of this lucrative market. Of this there is no doubt. The drop in LinkedIn’s stock price after Facebook’s announcement is strong evidence that investors clearly see the looming threat to the company.

LinkedIn currently has good working relationships with headhunters and a history of effective performance serving them. It needs to use these contacts to continue differentiating its capabilities in the marketplace. It must work hard to ensure that Facebook doesn’t become more than a simple list of jobs, and must use its strengths to keep Facebook from gaining traction with its headhunters and other allies. This is a strategic shot across LinkedIn’s bow, and it had better respond to the warning. This will be a battle of muscle vs. muscle, and it will be interesting to see how it plays out.

Yildirim: LinkedIn will have competition, but users of LinkedIn created more than just resumes in the past years. They created communities; they established interest groups. And there are consumers with existing subscriptions. Switching will be costly.

On the other hand, Facebook can become a serious rival for jobs where social skills matter. Sales positions and jobs in the entertainment industry are examples. Facebook can offer years of proof of leadership, communication and social interaction information history and photos. LinkedIn cannot yet offer such information or information on the personality of a person outside of the work environment.

K@W Today: Are traditional job boards like Monster.com and Indeed likely to disappear altogether?

Yildirim: It is important to listen to what past bosses, clients and co-workers say about a candidate during the hiring process — but not necessarily for every position. There are many positions where firms simply do not have the time or desire to collect information on a person’s social life. Or they prefer to evaluate the candidates through their own filtering mechanisms. Similarly, for highly skilled or specialized jobs, resumes matter more than what others say about you. There will be traditional hiring for such jobs, and traditional job sites will survive.  

K@W Today: Do you see any privacy concerns for Facebook users with this development?

Yildirim: I see many privacy concerns with online social networks and search engines, simply because they sit on too much private information and they archive it. Personal information is collected over the course of one’s life. Kids born today will have a digital archive of their entire lives online — initiated by their parents posting baby pictures on Facebook, [followed by those kids] creating a Facebook page at a very young age.

Such archives might become very useful one day for advertisers and researchers, but at the same time, they will be a headache for some others…. It is up to people and policy makers to say “no” to the archiving of their personal data beyond their approval.

A final note: I expect markets to create paid alternatives to firms that violate privacy. The number of such alternatives and small initiatives are increasing. DuckDuckGo (a search engine focusing on privacy) is an example

This post was previously posted in Knowledge@Wharton today blog: Facebook’s New ‘Social Jobs’ App — Like or Dislike?

From the Knowledge@Wharton today blog.

For any family business facing a transition from its founders to the next generation, several fundamental questions must be addressed: What are the assumptions behind the company’s culture and values? Are these assumptions helpful or harmful to succession? Do the culture and values lead to artifacts that serve as physical evidence of the company’s mission? 

To uncover some helpful assumptions, consider two companies that have enjoyed multiple successful generational transitions: SC Johnson and Son and the J.M. Smucker Company. SC Johnson was founded in 1886 when Samuel Curtis Johnson, at the request of his customers, created a preservative for hardwood flooring sold by his company. To create the product, he studied how Europeans preserved the wood floors in manor houses, and then he developed a formula that he perfected in his bathtub. The company’s culture, in part, is based on an underlying assumption of “doing.” The resulting value is, “We will not stop doing until the customer is satisfied.” The artifact is the founder’s bathtub, which played a central role in the company lore. 

Johnson also assumed that people and communities were essential to his success. The resulting value around employee practices is, “We care about you.” The value around community involvement is, “We are part of [the] communities in which we work and, therefore, believe in paying our civic rent.” Artifacts include a pamphlet titled, “This We Believe,” given to all employees. The pamphlet starts with the following powerful statement: “The goodwill of people is the only enduring thing in any business. It is the sole substance…. The rest is shadow.” 

J.M. Smucker dates to 1897, when Jerome Monroe Smucker began producing apple cider and apple butter from trees growing near his Orrville, Ohio, home. He was so obsessed with quality and fairness in his pricing that he added a bit more product in his jars to ensure that the customer was not being cheated. He also personally signed every lid of every jar he produced. Smucker assumed that in a business that bore his name, people had to be treated fairly and with respect. From this assumption, the values of quality products, fair treatment of employees, responsibility for the well-being of the communities where the company operates and customer satisfaction had their roots. An artifact that flowed from this basic assumption is the J.M. Smucker signature, which still appears on all jars of Smucker’s products. 

Both SC Johnson and J.M. Smucker perpetuate the memory of their founders with artifacts that remind all employees, both family and non-family, of what values the businesses holds dear. Both companies have created a participative culture in which customers, suppliers, family, employees and community all take part in decision making. 

Since a participative culture is essential to multigenerational success, how do you keep that type of culture in place through generational change? Knowing that future generations of children will be raised in different economic and social environments than their parents — and marrying spouses whose upbringing may be foreign to the culture of the business family — what is today’s business leader to do? 

The answer to this question can be summed up in one simple word: stories. Telling and codifying stories can distinguish a family business and promote its longevity. These stories can share the folklore of the company’s founding. They can explore the rationale for critical decisions that shaped the company’s development. They can recount the achievements, and failures, of past business cycles. They can recount meaningful or silly events that led to employee bonding. As a company’s leadership is being handed from one generation to the next, the stakes are raised for the company to articulate its culture — the assumptions, values and artifacts that have served as the “glue” over the years. 

In Made to Stick: Why Some Ideas Survive and Others Die, brothers Chip and Dan Heath write that one key to success is the use of stories, especially those that are emotional or inspirational. Hearing and internalizing stories from a company’s past can fundamentally change the way next-generation members will act when confronted with difficult situations. 

Storytelling can also benefit the company’s employees. Stories add color to the principles espoused by the company’s leaders and the assumptions underlying these principles. They help employees identify with the values and culture. A recent Reel Tributes client, a CEO of a family business turning 120 years old, cited his employees as a motivation for storytelling. As he explained early in the film project, “I want my staff to know how special the history of our company is, and how special they are to the history of the company. It’s this link that I want to establish with these stories.” A chapter of the film titled, “Finding and Keeping Passionate People,” is dedicated to the company’s staff. 

A company’s customer base is another key audience for its stories. Consumers prefer to buy from companies that share their values. But if the company doesn’t express what its values are, how are customers to know whether they are shared? For this reason, companies are increasingly presenting “Our History and Values” as a central part of their websites and marketing materials. Showing that a certain store has been in the same location for four generations, or that a company has raised millions of dollars for local charities, is a powerful sales tool. However, it is not enough to just list this information. Tying the history and values to stories, such as a personal anecdote from the CEO explaining why his daughter’s struggle with cancer led him to support the local cancer hospital, makes the connection with customers that much deeper. 

The key to encourage storytelling is to find the right people and ask the right questions. Chances are, the older generation holds a wealth of knowledge. Ask about the company’s founding, its background and its challenges. Find out what values were established early on, and how those values have changed over the years. 

Avoid limiting the storytelling to management and family. Invite employees to participate in the conversations. Multiple perspectives on the same story will emerge, and new information will be revealed about the company culture. This information may be glowing, or it may be difficult to swallow, but it will certainly be enlightening. 

Once the stories are told, the question then becomes, “What do we do with this information?” Technology has provided many options for recording and preserving stories. Companies can post their stories on their website. They can publish a book detailing the history and values of the company, and present copies to employees and customers. Digital tape recorders can collect oral histories for the company archives. Social media presents an engaging outlet for telling a company’s stories to its network of followers and receiving valuable feedback. And video documentaries allow for the compilation of interviews, photographs and other memorabilia in an engaging format. 

No matter what method is chosen, the process of sharing stories should start today. The reality is that while companies and their cultures can live on, founders and family members will not. Recording stories will ensure that the business — and the culture it has created – will not be forgotten.

This post was previously posted in Knowledge@Wharton today blog: The Power of Storytelling

From the Knowledge@Wharton today blog.

Austerity in Spain and most of Europe has failed, according to Wharton management professor Mauro Guillen.

Further proof came this week with the announcement that the Spanish economy’s downward spiral continued, with GDP shrinking by 0.4% in the third quarter — the fifth-straight quarterly decline — and unemployment hitting a record 25%.

Despite the government’s attempt to put off a eurozone-led bailout of public debt, expect Spain to accept terms within two to three months, says Guillen.

In this video, he addresses the question: Have attempts at economic reform in Spain worked on any level?

This post was previously posted in Knowledge@Wharton today blog: Spain Sputters as a Bail-out Moves Closer

From the Knowledge@Wharton today blog.

Skyrocketing sales of tablets and mobile devices have hinted at the notion that desktop and laptop PCs — once the staple for home computing — are beginning to collect dust in many households. And now, the numbers are starting to show that: Last week, Microsoft, a company whose business depends heavily on sales of PCs and related software, announced that its first-quarter net income dropped by 22%, with revenue down 8% from a year before. That followed an earlier report by research firm IDC that global PC shipments fell by 8.6% in the last quarter.

For many observers, such data suggest that the “death of the PC” is imminent. To get some perspective on that grim outlook, KnowledgeToday asked three Wharton faculty members if they envisioned a time when the humble personal computer as we know it will no longer exist.

Peter Fader, professor of Marketing:

Declining earnings at Microsoft are one thing — they are now facing viable competitors when it comes to operating systems and office tools, so that’s all part of the natural ebb and flow of competing firms. But I don’t see any signs of a declining market for PCs. Okay, maybe the forms are changing, but I view a tablet plus optional keyboard as a PC. Maybe a smartphone is different, but anything with a screen that is frequently operated with a two-handed keyboard is a PC in my book, and that seems to be a very healthy growing market.

I predict that the forms will continue to evolve — we ain’t seen nothing yet — but for the foreseeable future, I see strong demand for a device that does the kinds of things that a PC currently does. Microsoft may continue to fade away, and even the mighty Apple will fall, but that kind of device has a very healthy future.

Eric K. Clemons, professor of operations and information management:

“Death of the PC” is like death of the mainframe: Neither is likely to occur, and, indeed, the move to the cloud has made “big iron” [mainframes and servers] more important as a share of global computing, rather than less important. The PC serves a function. Sometimes I do not want to rely on the Internet, as when I am at 37,000 feet. Sometimes I do not want to rely on the cloud, as when I am working on a first draft of a legal opinion. Where we do our computing has for a decade or more been determined by telecom speed, local PC processor speed, need for storage and local PC storage capacity, software costs, and the need for privacy and security. The balance will keep changing. [The young] “digerati” will continue to mock old guys who write coherent emails on laptops instead of sending short tweets from an iPhone. Both smartphones and tablets will have a place, but so will laptops and desktop PCs.

Daniel A. Levinthal, professor of management:

Technologies, even ones that suffer an enormous degree of substitution, tend to survive in particular niche applications. Indeed, while the volumes will shrink, so will competition, and modest margins over modest volumes can be earned.

Also, the definition of the distinct category of “PC” may be (or is getting) a bit blurred. In what ways are the new Microsoft devices PCs or not PCs? Is the definition a function of the nature of the operating system? What fraction of processing is done on the machine versus (via an app) on a server? Is it a super narrow definition which implies a microprocessor made by Intel and operating system by Microsoft?

This post was previously posted in Knowledge@Wharton today blog: Has the ‘Death of the PC’ Been Greatly Exaggerated?

From the Knowledge@Wharton today blog.

Frugal engineering, or the process of trying to reduce the complexity and cost of a particular product, has been fashionable in India for some time now. Today, even as Apple’s iPad, Samsung’s Galaxy and Microsoft’s Surface battle it out at the pricey end of the spectrum, the tablet wars in India are being fought at the bottom of the pyramid.

Prices are falling to very low levels. Canadian company Datawind has launched a $40 tablet, with schools in India being its target market. However, this isn’t Datawind’s first foray in the country. The Indian government ordered close to 2 million tablets, branded Aakash (sky), from Datawind as part of the National Mission on Education. These tablets were priced even lower — with subsidies, they cost $35 for students and teachers. But delivery delays, failure to provide customer support and other problems resulted in the government ending its association with Datawind. The company is now offering its tablets — branded Ubislate — on its own.

Unfulfilled promises might have toned down the hype around Aakash, but Union HRD Minister Kapil Sibal has announced that a new version — the Aakash 2 — will be available for students soon. “Hopefully, on November 11, you will see the President of India talking to 20,000 students from across the nation, who will have their hands on [an] Aakash,” Sibal said at the Economic Editors’ Conference held in New Delhi in early October. “At the moment, we are actually formulating a Cabinet note for the manufacture of five million Aakash tablets without any financial burden on the Ministry of Finance,” he added. Sibal hopes to price the tablet at $35 by setting up manufacturing facilities in India.

The tablet market, traditionally dominated by global leaders Apple and Samsung, is already beginning to feel the heat from local players. According to a Cyber Media Research (CMR) report released in mid-October, Indian company Micromax enjoys the lead in the country with an 18.4% market share. Second is South Korea-based Samsung with 13.3% and Apple with 12.3%. (Market share has been measured in unit shipments between April and June of this year.) Rounding out the top five are local players HCL and Karbonn. All the Indian companies have “affordable” (nobody uses the word “cheap”) devices. The Micromax range starts at slightly more than $100. Apple and Samsung tablets cost at least five times as much.

Other manufacturers have also recently entered tablet territory. The CMR report states that until the second quarter of this calendar year, around 90 vendors had launched tablets in India. The report also says the ASV (Average Sale Value) of the tablets in the second quarter of 2012 dropped to around $240 from $480 in the first quarter of 2012; most vendors have launched their products in the $90 to $180 price range. For example, startup WishTel priced its tablet — IRA Thing 2 — at $120. Noida-based Zync Global has a range that starts at $75. The government-owned Bharat Sanchar Nigam is selling the basic model of the Penta T Pad (manufactured by Delhi-based Pantel) for $75.

According to the report, “Landscape of Tablet PC market in India” released in mid-October by MAIT, the representative body for the Indian information technology and hardware sector, the market for tablet PCs in India is set to grow at 40% every year for the next five years. Last year, tablet sales stood at 1 million units. India is the “new blue-eyed growth opportunity”, says MAIT president Alok Bhardwaj. “[The tablet] is fast becoming one of the drivers of rapid growth in the IT content consumption and hardware sector in India.”

But does frugal engineering work for technology products? The “affordable” car — the Nano — is selling below expectations. The Simputer, a hand-held computer developed in 2002 for India as a low-cost alternative to PCs, was a disaster. Priced at $230, it was too expensive for the rural consumer. There were technological glitches, too. But frugal engineering seems to have worked for sectors including cell phones and printer cartridges, however.

Faisal Kawoosa, lead analyst for telecom at CMR notes that low-cost tablet vendors “have tried to put in everything in terms of features and functionality — even those not present in Apple. For instance, [the tablets] have USB slots. But whether that is working well performance-wise is a question mark. It is too early for us to judge.”

This post was previously posted in Knowledge@Wharton today blog: Tablets in India Take to Frugal Engineering

Dale Boccabella

There are changes to taxation law, which are being introduced as part of the Mid-Year Economic and Fiscal Outlook. Company tax, the baby bonus and private health insurance are being targeted by the federal government.

The budget has lost $3.9 billion in tax receipts for this financial year since the May budget and $21 billion over four years. In particular declining commodity prices have led to a crash in forecast receipts from the mining tax from $13.4 billion over four years to $9.1 billion. As a result, the government has increased some taxation.

Corporations will have to pay company tax monthly, rather than quarterly. While this will ensure that instalments are closely aligned to fluctuations in these businesses’ income, it isn’t exactly going to be helpful to firms which are already struggling under a bureaucratic workload.

On the cuts to the baby bonus from $5000 to $3000 for the second and each subsequent child, this is a relatively minor item for the government – however it will impact on parents. Expensive items such as the cot, pram, change table and baby capsule can sometimes be reused for subsequent children, but they are often hit by other costs.

There are changes to private health insurance starting in April 2014. This will increase the cost of all premiums. Under the latest round of cuts, the government’s 30 per cent rebate will no longer automatically be increased to match the annual increase in premiums. Instead the rebate will be indexed to inflation, which is normally less than the premium increases. There’s a double whammy too – if the premium increase is less than inflation, the rebate will be indexed to that.

We already saw increases in the May budget. At the time, the government means-tested the private health insurance rebate, which will save it about $2.8 billion over four years. This further measure will save $700 million over three years. For those people who thought they had escaped by being under the private health insurance means testing limit, they will now be hit by having the rebate indexed to inflation. However I expect this measure may put a bit of pressure on the funds to try and cap their premium increases.

Dale Boccabella is an Associate Professor of Taxation Law at the Australian School of Business.

From the Knowledge@Wharton today blog.

The often oddly illogical behavior of insurance buyers and sellers has long fascinated Wharton health care management professor Mark V. Pauly and his colleague Howard Kunreuther, Wharton professor of operations and information management.

During their decades-long collaboration on market studies, the two compiled notes on the ways that insurance companies, consumers and regulators get it wrong — Pauly describes it as “a rogue’s gallery of insurance anomalies.” That collection ultimately became so substantial that they turned it into journal articles and then into a book titled, Insurance & Behavioral Economics: Improving Decisions in the Most Misunderstood Industry, to be published in December.

Why “misunderstood?” In an interview in the LDI Health Economist, a publication of the Leonard Davis Institute of Health Economics at the University of Pennsylvania, Pauly identified some of the reasons insurance buyers and sellers misconstrue each other’s intentions and responses so frequently. Topping the list is consumers’ widespread uncertainty about predicting risk or estimating probability, and a time-lag sense of entitlement to things that weren’t actually purchased in a transaction.

“Insurance is a contract where you pay your money up front and then whatever you’re going to get from it, you get later on,” Pauly said. “But just like a pre-paid vacation, that can be a recipe for frustration: People arrive at the hotel and believe they are entitled to free Mai Tais even though the fine print of their confirmation says they’re not. The thing I think people do understand — but want to pretend they don’t understand about insurance — is that if you didn’t pay for it and it was not specifically in the contract, you’re not entitled to it. Once consumers have paid their insurance premiums, many really do want to think they’re entitled to be paid for anything bad that happens to them.”

Insurers, Pauly said, “have just the mirror image. They see themselves as promising a certain number of things for a certain amount of money; and if you didn’t pay them for it, they shouldn’t be required to deliver it to you.”

However, he pointed out that the book doesn’t just target consumers’ foibles. “There’s plenty of blame, stupidity and irrationality to go around” for insurers and government regulators as well, he noted.

“We’re aiming this book partly at scholars and partly at people in the insurance industry who are sometimes inept in explaining what they do and why,” Pauly stated. “We say, ‘You’re often as irrational as consumers even though you have much more at stake.’ Hopefully, the book will make insurers think more carefully about what they do and also give them a little bit of defense for some of the things that need to be explained to consumers, regulators and policy types.”

Another goal of the book is to establish a benchmark for good insurance performance, then explore how various markets succeed or fail at meeting that benchmark.

“The majority of insurance dollars spent in the U.S. are spent in markets that are functioning fairly reasonably, but there are some markets where it’s totally nuts,” he said. The book makes an effort to compare the two different kinds of markets to identify characteristics that predict potential problems…. The book not only discusses anomalous insurance markets, it also discusses non-anomalous insurance markets because it wants to identify the characteristics that tend to predict anomalous behavior.”

One of the markets the authors scrutinize is health insurance, and their conclusions may surprise many.

“I don’t feel as bad about health care insurance after writing this book as I did before,” said Pauly, “because compared to a lot of other insurance markets, it’s not nearly as messed up. The kind of insurance sold even before the Affordable Care Act [ACA] provided pretty good coverage against low probability catastrophic events, which, in this case, is the potentially bankrupting circumstance of becoming a hospital in-patient.”

Health insurance performance behavior “was better than other kinds of insurance,” he said. “For instance, in terms of flood insurance, a consumer could say, ‘It will never happen to me because I haven’t seen a flood in my neighborhood in quite a while.’ But they do see catastrophic health events often enough to know that these aren’t that low a probability. So, from that point of view, health insurance looks better than average.”

One of the things the ACA is trying to address is that “if you buy your health insurance as an individual, there are really high administrative ‘loading’ and selling costs,” Pauly pointed out. “But the percentage of that for health insurance is about the same as other kinds of insurance people buy as individuals, like auto collision or homeowner coverage. That doesn’t mean it’s either bad or good. It just means that the imperfection and waste in the individual insurance market isn’t something unique to health insurance. It seems shared by virtually all insurances that people buy on a one-on-one basis.”

Pauly notes that many economists have their doubts about the ACA’s health insurance exchanges – competitive marketplaces designed to allow patients to buy insurance directly from a pool of different health plan options. He tells an economist joke to make his point: An economist and non-economist are walking down the street when the non-economist says, “That looks like a $20 bill over there. Why don’t you go pick it up?” But the economist keeps walking. The non-economist asks, “Why didn’t you go pick it up?” The economist says, “Don’t be ridiculous. If it was a $20 bill, somebody would have already picked it up.”

The moral, said Pauly, is that economists often suspect that if something isn’t happening, it shouldn’t; if exchanges were a good idea for individual insurance, wouldn’t there already be automobile insurance exchanges and homeowners’ insurance exchanges and life insurance exchanges? So how much can they add for health insurance?

But he is keeping an open mind. “I try not to be an economist one day a week,” he said. “Then I say there might be some good new ideas in the exchange concept, but they will have to be invented from scratch.”

Another focus of the book is “deductible aversion” — consumers’ tendency to automatically select insurance plans with the lowest out-of-pocket costs, despite the premium reductions from reducing coverage a little.

“The typical homeowner’s policy,” said Pauly, “will have a US$500 deductible. It turns out that if you bumped up that deductible to $1,000 or $2,000, the amount of premium you could save is generally much more than anything close to the average amount more you would lose in benefits. But people just like low deductibles.”

Ditto in health insurance, he said. “Many consumers and most policymakers are wary of increasing deductibles. But there’s a camp that believes that a more rational health insurance system would be one with high-deductible health plans of the kind that are, at the moment, winning the marketing battle in the group market. We will have to wait and see what kind of rationality or irrationality wins out.”

This post was previously posted in Knowledge@Wharton today blog: When Insurance Buyers and Sellers Speak Different Languages

From the Knowledge@Wharton today blog.

The consumer markets of India and China are widely viewed as a potential goldmine for companies and investors. These two markets are expected to triple over the current decade and by the end of 2020, are likely to be around US$10 trillion in size. Take away a few billions, or even a couple of trillions, and it would still be a huge opportunity for firms around the world. A newly-released book, The $10 Trillion Prize: Captivating the Newly Affluent in China and India, written by a quartet from Boston Consulting Group (BCG) aims to provide a window into the forces driving this new generation of consumers and discusses how companies can use this knowledge to their advantage to win not only in these two countries, but also in the rest of the world.

At a recent panel discussion on the book at the Indian Institute of Management, Bangalore (IIMB), co-author Michael J. Silverstein, who is one of the founders of BCG’s global consumer practice, and Abheek Singhi, leader of BCG’s India consumer practice, reiterated that this is an unprecedented opportunity in world history. The growth that China and India will see in the next 10 years is something that has never happened earlier in human history. “The secret [of success for companies] is to be able to identify the supply chains that allow for [the dissemination of] products at price points affordable for every segment,” said Silverstein.

Panelist Vinita Bali, managing director of Britannia Industries, noted that the huge absolute numbers in these markets mean that for every product category, and at every price point, there is a large base of consumers that can make doing business in the two nations worthwhile. “Companies who ignore these markets would be doing so at their own peril. And those who want to succeed here must be ready for the long haul. It takes a reasonably long time period to get the return on investment.” Singhi noted. “A half-hearted commitment is a recipe for disaster.”

While Singhi pointed to asset bubbles, political and social disharmony, bureaucracy and corruption, and environmental degradation and pollution as possible risk factors, panelist J. Ramachandran, professor of corporate strategy and policy at IIMB, suggested that “the central argument is the importance of education — How [India] as a nation [has] failed on the education front.” Pointing out that both the schooling and the higher education system in India are “broken and in a shambles,” Ramachandran said that the problems are a result of “policy issues.” Silverstein said that India is severely disadvantaged as compared to China in terms of its education system. “In India, education is under-funded, under-regulated and you tolerate 70% of primary schools being substandard. This is a matter of serious concern for India,” he noted. ”I believe that India is up to it. But it will require a change in behavior and a change in political capital.”

Another area where India is seen to be lagging behind China is in terms of excellence. “Excellence is a mindset and we don’t have enough of it,” Bali stated. “We tolerate a lot of nonsense and it permeates into a lot of what we think is acceptable.” Ramachandran added: “The clue to our future is how well we [strengthen] our education system. We must be unwilling to except less. That will drive the desire for excellence.”

This post was previously posted in Knowledge@Wharton today blog: How Companies Can Succeed in the China-India Market