In enterprise purchasing we very often find following situation: vendor promises more than he can/want really deliver and customer promises to pay more than he really is going to do. Finally both sides get less than expected, but more when only one side is honest.
We all know well such situation from daily life: "you will look in this car like Johnny Travolta!", "Cool! (but I know that to look as Johnny I need much more expensive car)".
In games theory this situation is very deep analyzed and known as prisoner's dilemma. In this game, regardless of what the opponent chooses, each player always receives a higher payoff by betraying. It is because we do not know intentions of opponent (as in real life when we are always not sure what are real intentions of our customer/vendor: Is he honest like an angel? Over-smart? Somewhere between?).
Situation is changing dramatically when we know our opponent intentions (this is area of superrationality). When we know that our customer/vendor is honest the winning strategy is also be honest and cooperate. In consequences vendor will deliver more, and customer will pay more.
So, how to get knowledge about our business partner intentions?
Wednesday, April 28, 2010
Value of Transparency
VRM - mathematical model
Since John von Neumann and Oskar Morgenstern book "Theory of games and economic behavior" in 1944 theory of games approach has been well known and successfully adopted. Not only in physics and economy but also in evolutionary biology and even in research related to consciousness structure (even me, I have also had honor to use Monte Carlo method during my university).
Between many advancements in games theory the most interesting from VRM perspective is concept of superrationality introduced by Douglas Hofstadter in Metamagical Themas in 1980.
Quotation from Wikipedia:
"Superrationality is an alternative method of reasoning. First, it is assumed that the answer to a symmetric problem will be the same for all the superrational players. Thus the sameness is taken into account before knowing what the strategy will be. The strategy is found by maximizing the payoff to each player, assuming that they all use the same strategy. Since the superrational player knows that the other superrational player will do the same thing, whatever that might be, there are only two choices for two superrational players. Both will cooperate or both will defect depending on the value of the superrational answer. Thus the two superrational players will both cooperate, since this answer maximizes their payoff."
Strategy mentioned above which can be used by vendor and customer in VRM area we can call "Transparency".
Between many advancements in games theory the most interesting from VRM perspective is concept of superrationality introduced by Douglas Hofstadter in Metamagical Themas in 1980.
Quotation from Wikipedia:
"Superrationality is an alternative method of reasoning. First, it is assumed that the answer to a symmetric problem will be the same for all the superrational players. Thus the sameness is taken into account before knowing what the strategy will be. The strategy is found by maximizing the payoff to each player, assuming that they all use the same strategy. Since the superrational player knows that the other superrational player will do the same thing, whatever that might be, there are only two choices for two superrational players. Both will cooperate or both will defect depending on the value of the superrational answer. Thus the two superrational players will both cooperate, since this answer maximizes their payoff."
Strategy mentioned above which can be used by vendor and customer in VRM area we can call "Transparency".
Monday, April 26, 2010
Sixth characteristic
In very inspirational article Brand messaging: the heart of it Alan Mitchell analyzes new roles of sellers and buyers. Talking with my fiends in Inlevel during last months we concluded that VRM is about changing information's disproportion between vendors and customers ("let's change it and see what will happened" it is idea of our company). It is probably not coincidence that people in different geographies and markets can consider such similar ideas, it is probably part of general trend and it is good, I think.
As Alan Mitchell mentioned brands are bringing to people full set of information's. What is very often more important brands also give people some "magic". If you look how happy were people wearing headphones with white cables of their lovely iPod's and how unhappy are people driving their Toyota's in USA - it should be something behind this. For sure it is not rational. Of course many theories and models can be found to describe this situation: psychological (conformism, etc.), sociological (group identity), anthropological (fetish), psychiatric (sexual substitutions) and thousands others. I think people taking under consideration different choices than offered by brands feel risk related to possible lost of this "magic". And they are right, because brands satisfy their needs of "magic". How this "magic" works? People have a tendency to mix up subject of perception and method of perception. For many people "story about facts" is the same as "facts", "knowledge about something" is the same as "something", "self perception" is the same as "self" (this mechanism was described many times, even in European Middle Ages as "medium quo" and "medium quod"). Of course the most of the people, not all, not every time, not in all cases.
Does it mean VRM do not have chance to be adopted? No. No, because of Internet, today's approach to customers from brand perspective is not so complete as before. Brands (despite of what they are talking about positioning) by default address everyone. Poor people know what is Rolex or Dior or Porsche, they desire and dream about iPad and Suzuki bike. Does not matter they never will be able to buy them, brands already provided them their messages. Most of the people, before Internet - good enough.
Allan Mitchell mentions five characteristics how modern markets work (what is and what should be). Maybe it is worth to add sixth characteristics:
Using current communications tools it is possible to find, understand, communicate and satisfy people who at the moment are looking for particular object, not only its perception.
As Alan Mitchell mentioned brands are bringing to people full set of information's. What is very often more important brands also give people some "magic". If you look how happy were people wearing headphones with white cables of their lovely iPod's and how unhappy are people driving their Toyota's in USA - it should be something behind this. For sure it is not rational. Of course many theories and models can be found to describe this situation: psychological (conformism, etc.), sociological (group identity), anthropological (fetish), psychiatric (sexual substitutions) and thousands others. I think people taking under consideration different choices than offered by brands feel risk related to possible lost of this "magic". And they are right, because brands satisfy their needs of "magic". How this "magic" works? People have a tendency to mix up subject of perception and method of perception. For many people "story about facts" is the same as "facts", "knowledge about something" is the same as "something", "self perception" is the same as "self" (this mechanism was described many times, even in European Middle Ages as "medium quo" and "medium quod"). Of course the most of the people, not all, not every time, not in all cases.
Does it mean VRM do not have chance to be adopted? No. No, because of Internet, today's approach to customers from brand perspective is not so complete as before. Brands (despite of what they are talking about positioning) by default address everyone. Poor people know what is Rolex or Dior or Porsche, they desire and dream about iPad and Suzuki bike. Does not matter they never will be able to buy them, brands already provided them their messages. Most of the people, before Internet - good enough.
Allan Mitchell mentions five characteristics how modern markets work (what is and what should be). Maybe it is worth to add sixth characteristics:
Using current communications tools it is possible to find, understand, communicate and satisfy people who at the moment are looking for particular object, not only its perception.
Thursday, April 22, 2010
Communication
Referring to discussion started at Get ready for Vendor Relationship Management just one word about communication issue in VRM area.
There are big knowledge about communication as a subject. I would like to remind one of its attributes: communication is always simpler that we think (situation at the party is typical: when we think about conversation with unknown person it is horrible, when we start to talk it is easy).
Vendors develop products and all marketing messaging around them. Then vendors invest money to hire and train sales force. What is happened when sales guy meets customer? He listens customer who is using different language than language prepared by vendor (like this: "I want to buy nice, red car, big enough to carry two children", sales person answer "do you prefer four weels drive and turbo engine?"). What is worth to know, sales person before he was trained by vendor he thought like other people and for sure he remember that. He understand what customer is talking about and he knows what vendor wants he should say. A the first look it is little bit schizoid situation. In the most cases I know and I met in my life (I was a sales guy in enterprise area selling software) such sales person feels obliged to use mainly vendor messaging and enforce customer to do the same. The hope for VRM is that today's customers (equipped with Internet connection and proper tools) can be strong enough to enforce sales guy to use also his language. I expect that big group of vendors around the world is ready to allow (and prize) its sales force to do this.
There are big knowledge about communication as a subject. I would like to remind one of its attributes: communication is always simpler that we think (situation at the party is typical: when we think about conversation with unknown person it is horrible, when we start to talk it is easy).
Vendors develop products and all marketing messaging around them. Then vendors invest money to hire and train sales force. What is happened when sales guy meets customer? He listens customer who is using different language than language prepared by vendor (like this: "I want to buy nice, red car, big enough to carry two children", sales person answer "do you prefer four weels drive and turbo engine?"). What is worth to know, sales person before he was trained by vendor he thought like other people and for sure he remember that. He understand what customer is talking about and he knows what vendor wants he should say. A the first look it is little bit schizoid situation. In the most cases I know and I met in my life (I was a sales guy in enterprise area selling software) such sales person feels obliged to use mainly vendor messaging and enforce customer to do the same. The hope for VRM is that today's customers (equipped with Internet connection and proper tools) can be strong enough to enforce sales guy to use also his language. I expect that big group of vendors around the world is ready to allow (and prize) its sales force to do this.
Wednesday, April 21, 2010
Word-of-Mind
In recent McKinsey publication: A new way to measure word-of-mouth marketing some interesting observations could be found. Authors state:
"The sheer volume of information available today has dramatically altered the balance of power between companies and consumers. As consumers have become overloaded, they have become increasingly skeptical about traditional company-driven advertising and marketing and increasingly prefer to make purchasing decisions largely independent of what companies tell them about products. "
And in further section:
"Marketers have always been aware of the effect of word of mouth, and there is clearly an art to effective word-of-mouth campaigning. Yet the science behind word-of-mouth equity helps reveal how to hone and deploy that art: it shows which messages consumers are likely to pass on and the impact of those messages, allowing marketers to estimate the tangible effect word of mouth has on brand equity and sales. "
Conclusion is simple: customers are skeptical about what companies tell them about products and customers express their skepticism using words and arguments taken from companies "word-to-mouth" campaigns. Do customers have at least one though independent of marketers influence?
"The sheer volume of information available today has dramatically altered the balance of power between companies and consumers. As consumers have become overloaded, they have become increasingly skeptical about traditional company-driven advertising and marketing and increasingly prefer to make purchasing decisions largely independent of what companies tell them about products. "
And in further section:
"Marketers have always been aware of the effect of word of mouth, and there is clearly an art to effective word-of-mouth campaigning. Yet the science behind word-of-mouth equity helps reveal how to hone and deploy that art: it shows which messages consumers are likely to pass on and the impact of those messages, allowing marketers to estimate the tangible effect word of mouth has on brand equity and sales. "
Conclusion is simple: customers are skeptical about what companies tell them about products and customers express their skepticism using words and arguments taken from companies "word-to-mouth" campaigns. Do customers have at least one though independent of marketers influence?
Wednesday, April 7, 2010
Communities of commerce
What Internet communication really brings to our purchasing behavior? Look at this article: Meet The Metamediary:
"Most products, for example, consist of a physical component and an information component. When consumers buy a camera, a car, or books, they’re also buying information about the products. Furthermore, most complex products require the obligatory purchase of complementary products and services: A computer requires software, a camera requires lenses and an automobile is sold with warranty, financing and optional accessories.
In the analog world, automobile buyers rely on automobile dealers for information, negotiation, financing, warranties and delivery of automobiles. The bundling of functions and offerings offers “one-stop shop” convenience to consumers, who would otherwise have to deal with several product and service providers. Relying on bundling, however, also involves significant compromises, because middlemen are often not the best or lowest-cost providers of information or complementary products. Auto dealers, for instance, often use new car sales as a loss leader to sell higher-margin accessories, financing and extended warranties.
In the networked economy, customers can search for information, negotiate, pay for and receive delivery of products at different points in time, and from different providers. This means that integrated mediators can be replaced by a combination of specialized “marketspace mediators” who manage information flows, and a set of specialized “marketplace mediators” who manage physical flows."
"Most products, for example, consist of a physical component and an information component. When consumers buy a camera, a car, or books, they’re also buying information about the products. Furthermore, most complex products require the obligatory purchase of complementary products and services: A computer requires software, a camera requires lenses and an automobile is sold with warranty, financing and optional accessories.
In the analog world, automobile buyers rely on automobile dealers for information, negotiation, financing, warranties and delivery of automobiles. The bundling of functions and offerings offers “one-stop shop” convenience to consumers, who would otherwise have to deal with several product and service providers. Relying on bundling, however, also involves significant compromises, because middlemen are often not the best or lowest-cost providers of information or complementary products. Auto dealers, for instance, often use new car sales as a loss leader to sell higher-margin accessories, financing and extended warranties.
In the networked economy, customers can search for information, negotiate, pay for and receive delivery of products at different points in time, and from different providers. This means that integrated mediators can be replaced by a combination of specialized “marketspace mediators” who manage information flows, and a set of specialized “marketplace mediators” who manage physical flows."
VRM and metamediaries
This quotation is taken from the old article and it well relates to VRM implementation in business to business relationships (B2B):
"The emergence of new metamediaries promises to even out some of the inefficiencies outlined above by squeezing out costs, while making conventional processes more effective through the use of information technology. These metamediaries create central and "virtual" information hubs, which aggregate information, and bring together geographically dispersed buyers and sellers. This enables a reduction in search and purchase costs, improves process efficiencies within participant firms, and enables just-in-time procurement as the reliability of the marketplace increases over time."
Bharat Rao: Emerging Business Models in Online Commerce, December 12, 1999
"The emergence of new metamediaries promises to even out some of the inefficiencies outlined above by squeezing out costs, while making conventional processes more effective through the use of information technology. These metamediaries create central and "virtual" information hubs, which aggregate information, and bring together geographically dispersed buyers and sellers. This enables a reduction in search and purchase costs, improves process efficiencies within participant firms, and enables just-in-time procurement as the reliability of the marketplace increases over time."
Bharat Rao: Emerging Business Models in Online Commerce, December 12, 1999
Sunday, April 4, 2010
Change
VRM suggests that enterprise purchasing can be done in new way. It means that methods of acquisition should be changed. Simple and interesting model of process of change can be found in interview with author of "Switch: How to Change Things When Change Is Hard" Chip Heath. According to his observations people who are doing purchasing should:
- understand that in new Internet communication era technology purchasing is not so complicated and risky as in the past (now it is much more easier to collect and verify all necessary information's and make good, based on them decision)
- get a feeling that technology acquisition is the most exciting job within the company and there is no reason to spend 90% of time just working on justifying reasons for purchasing decisions anymore.
- understand that in new Internet communication era technology purchasing is not so complicated and risky as in the past (now it is much more easier to collect and verify all necessary information's and make good, based on them decision)
- get a feeling that technology acquisition is the most exciting job within the company and there is no reason to spend 90% of time just working on justifying reasons for purchasing decisions anymore.
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