Ahan Analytics, LLC Thought Blog - Thoughts on making practical use of analytics
Feb
1

Dan Siroker’s Five Keys to Successful Data Analysis

written by Dr. Duru

Dan Siroker, former Director of Analytics for the Obama Presidential Campaign, was a keynote speaker at SoCon10. SoCon is an annual conference run by the Center for Sustainable Journalism at Kennesaw State University in the Atlanta, GA area. This year’s theme was “Proven Social Media, Social Network Tactics to Enrich Your Business, Nonprofit and Yourself.”

Siroker described how his team used the power of data analysis to raise an extra $44M or so for the Obama presidential campaign. Here are his five keys to success in getting actionable and profitable results using data analysis:

  1. Define quantifiable success metrics. For Siroker, these were donations and votes.
  2. Question assumptions.
  3. Divide and conquer (segmentation of data).
  4. Take advantage of circumstances – be prepared to leverage unplanned events.
  5. Always be optimizing – continual improvement.

Siroker’s results speak for themselves!

Jan
31

Pricing Program at the UC Berkeley Center for Executive Education

written by Dr. Duru

The UC Berkeley Center for Executive Education is offering a 4-day pricing program called “Pricing for Profitability in the Information Age“, April 27-30, 2010 and November 15-18, 2010.

Here is the intro and program description provided by the program’s website:

“Companies leave millions, sometimes billions, of dollars on the table every year through sub-optimal pricing practices. The current abundance of customer data, in the context of increased global competition and the instant information sharing made possible by the internet, requires companies to not only set the right prices, but to continually monitor and refine pricing.

The four-day Pricing program at the UC Berkeley Center for Executive Education equips managers with proven techniques for assessing, formulating, and monitoring pricing strategies. Participants will learn several powerful principles of pricing, and will explore innovative approaches that take full advantage of the rapid changes brought about by the information age. The tools developed in this course will enable participants to fully integrate the 3Cs of pricing (Customers, Competitors, and Costs) into the best price for your products.

At the end of the program, participants will be awarded a certificate of completion by the UC Berkeley Center for Executive Education.”

Jan
8

Tom Davenport Discusses New Book: “Analytics at Work: Smarter Decisions Better Results”

written by Dr. Duru

Tom Davenport discusses his new book “Analytics at Work: Smarter Decisions Better Results” in Information Week. Davenport and his co-author, Jeanne Harris, wrote this follow-up to:

  1. Provide a guide for creating and promoting analytical capabilities without making analytics a core business strategy.
  2. Emphasize the importance of data governance.
  3. Introduce a formal framework called the DELTA model: Data, Enterprise, Leadership, Targets, and Analysts.

Here is the intro to the article:

“The business best seller Competing on Analytics made the case that there are big rewards for organizations that embrace data-driven decision-making. Offering a preview of his soon-to-be-released follow-up, Analytics at Work: Smarter Decisions Better Results, co-author Thomas H. Davenport , professor of information technology and management at Babson College, recaps the book’s five-stage “DELTA” model for assessing and improving analytical decision-making.”

Dec
10

Why Can’t I Have the Brownie Instead of the Muffin with My Box Lunch Special?

written by Dr. Duru

I maintain a relatively regular lunch rotation that features essentially the same main item at each eating establishment. Today, I was delivered a shock to my comfortable culinary routine: I was told that I could not substitute a brownie for the muffin that comes with the chicken salad sandwich box meal at, what I will call, “Establishment X.” (Note that the woman at the cash register was not the same woman I have seen for all these many months to-date. I can only assume that THIS time, I got the manager/owner!)

As I did my best to conceal my complete and utter shock and dismay, I casually observed that the brownie is the same price as the muffin ($1.99 vs $2.00). I was summarily informed that “the ingredients are different. They just use different ingredients. And the muffin is really good.” My overt protest shut down at that point, but my inner pricing analyst began gnashing away on the logic of this tragic situation.

Eating establishments typically use bundling to entice consumers to buy additional food that they otherwise would not have purchased separately, either because of price or (temporary) appetite constraints “at the moment or at the margin.” This technique is profitable when the complementary product has a high enough margin such that the effective discount applied to the extra food item still results in a positive overall margin.

In the case of the brownie vs. the muffin, I can only assume that the cost of the ingredients of the brownie are higher than those of the muffin (assuming no difference in labor and spoilage costs, etc..). If so, then all my earlier substitutions have caused Establishment X to lose some untold amount of profit (likely very small).

It was not in my interest to provide unsolicited pricing advice in this case since I am the consumer. However, if Establishment X hired Ahan Analytics, LLC for pricing consultations, I would likely recommend increasing the price of the brownie. Let’s assume a 25 cent increase still leaves the muffins with higher margins. This price increase would serve multiple purposes which should lead to higher overall profits:

  1. Drive consumers who are indifferent between muffins and brownies to buy the more profitable muffins.
  2. Extract more money out of consumers who strongly prefer the brownie and are willing to pay accordingly. I am biased on this point because I believe the brownie is at least ten times better than the muffin, and the slightly higher price would not discourage my purchase of the brownie by itself.
  3. Eliminate confusion about the relative value of the brownies vs. the muffins in the sandwich meal.
  4. Provide an opportunity to offer a brownie option for the sandwich meal at a slightly higher price.

Given I have plenty of other eating options in my lunch routine, I will not likely miss the chicken salad sandwich meal. I will just have to find solace in the “satisfaction” that on future visits, I will be purchasing the brownie at some discount to its, let’s say, “true price.”

Nov
19

Dan Siroker – Director of Analytics, Obama Presidential Campaign – Keynote Speaker at SoCon 10

written by Dr. Duru

FYI – Dan Siroker, Director of Analytics, Obama Presidential Campaign, will be a keynote speaker at SoCon 10, January 29-30, 2010.

SoCon is a conference on Social Media and Social Networking held in the Atlanta area every year since 2007. I attended in 2008, and I highly recommend it for anyone interested in this space.

Here is how SoCon describes this year’s conference:

“In the first three years, we introduced social media, user-generated content, blogs, podcasts, video logs, social networking, wikis, Twitter… but nothing stands still. Find out what you have to know in 2010 to stay ahead of the learning curve. Find out who is doing great stuff; who has great, innovative ideas. Network and learn — and maybe even partner with — independent content producers, new media pros, academics and people from across the spectrum of marketing, public relations, legal, human resources, and executive ranks.”

Nov
16

Burger King Broiling: Struggling with Global Vs. Local Profit Optimization

written by Dr. Duru

On the same day that BusinessWeek lauded Subway for the success of its discount $5 footlong sandwiches, the National Franchise Association (NFA) sued Burger King Corporation over the legality of requiring franchisees to charge no more than $1 for the Double Cheeseburger. The Subway success story features a pricing strategy built from the bottom where the initiative and innovation of a single franchise owner led the way. The local profit optimization of the franchisees directly support the global profit optimization for Subway as a whole. The unfolding drama at Burger King features a pricing strategy commanded from the top against the expressed desires of the majority of franchisees. The global profit optimization that has convinced management to plow ahead appears to violate the local profit optimization of the majority of franchisees. The dispute has now devolved into a lawsuit filed in the U.S. District Court Southern District of Florida on November 10, 2009. The class action complaint starts with the following introduction:

“This action arises out of a dispute between NFA, on behalf of all owners of franchised Burger King restaurants in the United States (the Franchisees), and Burger King Corporation (BKC) concerning BKC’s actions in compelling the Franchisees to sell a food product known as the BK Double Cheese Burger (DCB) at no more than the maximum price of $1.00, and BKC’s claim that it has the legal right to dictate price points under the respective Franchise Agreements (the Franchise Agreements) previously entered into with the Franchisees – even if those prices are below the Franchisees’ cost and cause them to incur a loss on sale of the product.”

The core of the complaint is as follows:

“The provision of the Franchise Agreement at issue is Section 5, addressing ‘Standards of Uniformity of Operation.’ It provides that ‘BKC shall establish, and cause approved suppliers to the BKC System to reasonably comply with, product, service and equipment specifications.’

While these provisions address standards of uniformity for various operational issues, including menu items, hours, and uniforms, nothing states that BKC has the right to impose mandatory price points for product sold by the Franchisees. The dispute between the parties is triggered by the position recently taken by BKC, contrary to decades of practice, that the general language of Section 5 gives it the power to set prices for its independently owned franchises…Since at least the 1960’s (if not back to the beginning of the BKC franchise system itself), BKC never attempted to unilaterally impose or require a price point for products sold by Franchisees, and did not take the position it had the right to do so under the Franchise Agreements.

After the formation of [the NFA] and a Marketing Advisory Committee in 1989 and shortly thereafter, BKC did not attempt to set, much less enforce, mandatory price points for its franchisees without the agreement of a supermajority of the franchisees.”

Burger King has responded that “the litigation is ‘without merit,’ particularly after an earlier appeals court ruling this year showing the company had a right to require franchise owners to participate in its value menu promotions.”

The legal issues will likely get resolved by determining which contracts are legally binding and what are the conditions for enforcement. I am much more concerned with the strategic and economic issues.

The price cut on the DCB is dramatic; the drop from $2 to $1 positions the DCB below McDonald’s DCB priced at $1.19. The gross margin loss of -10% is significant; the DCB costs on average $1.10 to make. The complaint notes that no other item on the BKC value menu loses money. Based on this loss, franchisees rejected the first proposal in 2008 and rejected it twice by vote this year.

In “$1 deal may boost profits,” the Miami Herald describes an analysis generated by a franchisee that concludes that the $1 DCB is a money-loser:

“…financial models run by one Illinois franchisee and circulated among franchisees across the country suggest that [the $1 DCB] won’t drive enough sales to offset the margin pressure. The franchisee models suggest that the bottom line impact for restaurants would be a loss of between $489 and $930 depending on the percentage of total sales generated by the value menu.”

However, management has its own analysis (and assumptions) showing the $1 DCB is a winner. Again, from the Miami Herald:

“Based on numbers Burger King provided to franchisees, the company projects that the double cheeseburger will lead to a 5-percent increase in restaurant sales. That will translate into an increased bottom line profit of $365 per restaurant based on $105,000 in sales, according to the analysis.”

How could the franchisees and management come to completely different conclusions on the merits of this pricing strategy? Soda and fries make the difference. Soda and fries are higher-margin items. If the cheap DCBs generate extra sales traffic that buys soda and fries, then it is possible to make up the loss in profit from the DCB. In fact, BKC management is relying exactly on this dynamic. The McClatchy-Tribune reported on Nov 13, 2009:

“During an 18-month test, the $1 double cheeseburger had a negative impact on gross profit margin, Burger King said, but restaurants increased gross profit because consumers added high profit items like sodas and fries.”

In “Burger King’s battle cry: $1 burger,” the Chicago Tribune reports how the local optimization can invalidate the attractiveness of a mandatory $1 DCB promotion:

“John McNelis, president of the real estate division of Mirabile Investment Corp., owner of more than 40 Burger Kings in the Memphis, Tenn., area [states]: “…in some price-sensitive markets, you are just selling a bunch of double cheeseburgers…”

The cheap DCB pricing strategy works if soda and fries are “complementary products” to the DCB. However, if these products are truly complementary, then the more profitable pricing strategy is to make sure that DCB-buyers purchase soda and/or fries by bundling the products into one offering. In other words, customers can only buy the DCB for $1 if they also buy soda and/or fries for a price that generates a profit for the entire bundle. Without this bundle, BKC is using a loss-leader strategy in the hopes that the extra foot traffic will behave in a profitable way.

I suspect that BKC is not bundling the $1 DCB with soda and fries because the bundle would work counter to its efforts to attract increasingly price sensitive customers (high demand elasticity) and would obscure its price positioning versus McDonald’s. Putting the reported analyses aside, I suspect that when BKC runs its global optimization, it finds that it has enough markets with customers who will buy the bundle on its own merits. Absent profits, BKC could still justify the program based on customer retention in the hopes that customers stay loyal to the brand even after the money-losing promotion ends (a much shakier proposition in the highly competitive fast-food category). The franchisees run a series of local optimizations and find too many individual franchisees who lose money to make the program worthwhile as a mandatory offering. Apparently, there are enough of these profit-losing franchises to motivate the lawsuit (according to the class action complaint, about 75% of franchisees belong to the NFA). Indeed, the diversity of markets explains why most discount promotions amongst franchises include the caveat “at participating locations only.” The local optimization typically dominates the global optimization.

Burger King’s August 25th conference call to discuss fiscal fourth quarter 2009 earnings provides additional clues into management’s rationale for implementing a mandatory $1 price point for the DCB (quotes from the transcript provided by Seeking Alpha).

Management describes how it used controlled experiments to measure the potential success of a $1 DCB:

“…we have probably now well over 40 markets in the country that are on $1 Double Cheeseburger and we’ve actually seen a pretty steady check performance…And we’ve really been pleased with what our plans were for check dilution versus what’s really happening in those markets.

…there’s no question that the $1 Double Cheeseburger through its adoption in increasing amounts of markets in the U.S. has helped to improve traffic. So we have seen month-to-month-to-month improvements, a narrowing if you will on our traffic losses nationally and we have certainly seen the markets that have adopted the $1 Double Cheeseburger move into some very strong performance as it relates to traffic.”

Burger King management is eager to reduce losses in traffic. It is probably no surprise to anyone that discounting a burger by 50% will drive increased traffic. There is no indication here that the promotion is actually making money, only that it is losing less money than expected.

Again:

“…we modeled for some GPM [gross profit margin] dilution in the business case for $1 Double Cheeseburger but so far all the test markets have been outperforming in terms of GPM dilution. In other words it has not been as deep as we originally thought. What you really kind of see happening is the effect of this discounting is sort of offsetting the price increases that we’ve taken in the past which would kind of cause for the level check if you will that you’re seeing.”

There is no explanation here that sales of sodas and fries are specifically making up for the profit loss on DCBs. Instead, it seems that price increases on a variety menu items have given BKC the extra cushion it needs to justify using the DCB as a loss-leader. Management does not provide details on these price increases, but, in general, they seem odd given the existing competitive environment and sluggish economy. All together, it seems that traffic is the prime motivator for the promotion – with the assumption that short-term profit-losses will somehow give way to longer-term profit gains.

Finally, it seems competitive pressures are forcing Burger King to take extreme measures:

“…we have to be aggressive on value for the money. There’s no way you can turn on a television set and look at any retail brand in any space and not hear language that talks about price points and value. And we’re no different. Now our value for the money equation also includes talking about a superior tasting product with flame-fresh taste. It includes featuring our superior size versus McDonald’s on our Double Cheeseburger. And yes it’ll continue to pound on the $1 access.”

In the end, BKC’s global optimization is apparently not convincing enough for the franchisees who are presumably more concerned with their individual local optimizations. Certainly, the NFA should not have filed its class action complaint if BKC’s market tests demonstrated comprehensive profit gains from a preponderance of successful local optimizations. A global optimization that delivers average profit gains across the system is insufficient to justify a franchise-wide, mandatory pricing strategy. If this averaging is indeed the true source of the conflict, it is akin to averaging the net worth of Bill Gates and your home town and concluding that your home town would be filled with millionaires if Mr. Gates moved in.

This lawsuit will be fascinating to follow as it could provide additional insights and clarity into BKC’s pricing strategy and the actual data used to justify it.

Nov
11

Analytic Lessons from Subway’s $5 Footlong Promotion

written by Dr. Duru

Subway’s $5 footlong promotion has become a nationwide hit. In “The Accidental Hero,” BusinessWeek writer Matthew Boyle describes how the promotion grew from just a few franchises in Florida to become a top-10 fast-food brand this year. The story demonstrates how a small, local idea can become a nationwide success. The story also powerfully displays some key analytic lessons on the application and use of demand elasticity and controlled experiments to improve business performance in a sustainable way.

Demand Elasticity
Subway’s $5 footlong promotion was so popular, so fast, that it caused inventory shortages throughout the company. This surge in sales volume generated more revenue AND profits starting with the pioneering franchise: “…food costs did rise as a percentage of sales, but that was offset by the overall boost in volume and the increased productivity of …employees, who had less down time. Even after adding two new staffers, [franchisee] Frankel made money on each $5 sandwich.”

In other words, the footlong sandwich used relatively more expensive food than the typical sandwich, but sales volumes increased the proportion of time employees spent making sandwiches versus standing idle. The biggest bonus likely came from the incremental demand created by the promotion. The new demand created by the promotion directly added to revenues and profits. The lower pricing brought new customers to stores and (presumably) encouraged existing customers to buy more sandwiches. Subway discovered that these sandwiches have very high demand elasticity (for reasons described in the article), meaning that the percentage increase in demand was very high relative to the percentage change in price. The menu of higher pricing had prevented Subway from tapping into a hidden reservoir of demand. (Note that food service consultant Dean Dirks speculates that Subway’s promotion is actually a money-loser).

Controlled Experiments
Subway managed to execute this powerful pricing concept without analyzing past transaction data. Instead, Subway used the more direct approach of controlled experimentation.

Controlled experimentation allows a business to try out an idea in a well-defined place and time. This setup facilitates convenient data collection and fast analysis of the data. If the idea works in the controlled setting, then expand the trial into a slightly larger controlled setting. Repeat the process until the recipe for success (or failure) appears sufficiently confirmed and understood.

In Subway’s case, the numbers spoke loud and clear. Profits and revenues soared for Frankel soon after launching the promotion at his two franchises in Miami. It ran for a year before it was tried at another Florida location, this time in Ft. Lauderdale: “On the first day of the promotion, the store nearly ran out of bread and meat. Sales doubled.” Next, the promotion expanded throughout South Florida and met more success. Despite this winning record, Subway’s franchisee marketing board still voted down a proposal to expand the promotion nationwide. Additional successes from “Washington to Chicago” finally convinced the board to approve nationwide expansion.

Key Lessons
The article does not count how many controlled experiments Subway has run in the past that began successfully and yet ended in failure. We also do not know how many “bad” ideas the board must endure at every meeting. (Many stories about success in business suffer from “survivorship bias” where only proven winners make it to the front page and the losers of the past are long forgotten). However, a key lesson in this story is that ideas for change are strengthened when backed by evidence and data. Subway was fortunate to own an infrastructure conducive to running and maintaining controlled experiments and fortunate to stumble upon an idea whose success was so undeniable. Even if your business is not similarly fortunate, applying the lessons of pricing to demand and of generating evidence through experimentation will certainly drive measurable improvement in your business.

Sep
28

Georgia’s Schools Struggle with Data Analysis But Your Business Need Not Suffer Too

written by Dr. Duru

The Atlanta Journal-Constitution reported on September 26, 2009 that “despite more than a decade of effort and millions of dollars, Georgia’s system for tracking the progress of public school students remains deeply flawed.” The article describes a very tortured and wasteful process that has yet to yield any meaningful analysis or change in Georgia’s public schools. Georgia’s experience contains many lessons applicable to any business that can use data analysis to improve business performance:

  1. Maintain consistent leadership over projects implementing tools for data analysis. It is all too easy to continue to rely on the gut instincts and subjective assessments of the past. Strong leadership is required to break down old habits, evangelize the benefits of sustainable, data-driven approaches to running the business, and even challenge special interests who do not want mistakes revealed by evidence and facts.
  2. Do not leave staff to wallow in the misery of collecting and managing data. Their time and effort is very valuable, and it is better spent analyzing the data and developing recommendations from it.
  3. Build analytic systems that track changes over time and place. This is the only way to monitor performance and to develop benchmarks that serve as the basis for improvement.
  4. Integrate systems across groups and divisions as much as possible. This leverages effort and creates larger potential for creating strategies that are optimal for the entire business and not just specific entities.
  5. Carefully assess the make vs buy decision. If the company lacks the skills and/or the will to see an implementation through to its successful conclusion, then hire a firm that demonstrates those capabilities AND can train staff to maintain and use the system for the foreseeable future. Make honest assessments about whether or not the company truly has the resources to hire the correct staff and buy the correct hardware for making an analytic system work. Understanding the return-on-investment (ROI) of making data-driven decisions will help focus make vs buy decisions.

Follow these steps, and your business will be well on its way to executing data-driven strategies for improving business performance.

Sep
13

Product Quality Can Attract A Captive Audience

written by Dr. Duru

This weekend, my alma mater, Stanford University, played football at Wake Forest. I was fortunate enough to make the trip although Stanford was not fortunate enough to win. I was also not fortunate enough to eat lunch before attending the game, paying $9.50 for the privilege of enjoying a small pepperoni pizza and an ice-loaded soda. I lamented with my friend the high cost of participating in a captive audience (the stadium does not allow outside food or beverage, but, of course, I cared more about attending the game).

Businesses love captive audiences because they provide a marketplace full of consumers who care more about an experience than its price. Moreover, a captive audience typically has no good alternative to the products and services offered for the duration of its “stay.” During a recession or economic slowdown, a captive audience can be an important and effective tool for protecting price points and maintaining profits. In the case of the college football stadium, the price of admission is relatively low ($17), while the price of staying is relatively high (in the form of concessions, seat rentals, and other products).

Investments in product quality can also help a business create a captive audience. Establishing a reputation for high quality products also translates into a strong brand name. A strong brand name consumes mind share in a marketplace – the captured audience – and constructs a higher barrier for competitors trying to win over customers. Most importantly, high product quality generates the goodwill in the marketplace that leads to the strong willingness to pay required to protect price points (and profits). These dynamics are particularly powerful during an economic slowdown where customers are extremely motivated to reduce expenditures.

There are a few required elements for high product quality to provide the kind of captured audience described here. Market and product analysis can verify how strongly a company scores on these elements.

  1. “Good enough” is not sufficient to accomplish the customer’s goals.
  2. Adequate substitute products do not exist and/or are extremely difficult to develop.
  3. Investments to sustain high product quality are not prohibitive in cost.

Trina Solar understands these concepts. Trina Solar operates in an industry where projects cost a lot of money, project financing is tight, competing products are in high supply (quickly becoming commoditized), and pricing pressures abound. However, during its last earnings conference call, Trina Solar emphasized its advantage in this environment due to its reputation for high product quality, an extremely important characteristic in the solar marketplace. A substantial portion of Trina’s business has also been in small markets (Belgium and Italy) where it is considerably easier to construct the “captured audience.” Trina now looks to leverage its success into larger markets like China and the U.S. If the company continues to deliver on its promises of high quality (at lower costs even), it should continue to capture larger market share…and audiences.

Aug
27

Nothing is free in an exchange-based economy

written by Dr. Duru

Barbara Kahn, Dean of the School of Business Administration at the University of Miami, appeared on Nightly Business Report August 25, 2009 to comment on the new book “Free: The Future of a Radical Price” by Chris Anderson. Kahn rightly points out that even when consumers seem to be getting goods and services for free, they are actually exchanging something other than money that can be just as valuable like “…their time, loyalty or trust.” Kahn notes that “Free television isn’t free; it costs your time and attention and that’s valuable to advertisers. Facebook users invest their network of friends, which ties them to a system and that is valuable.”

In these examples the consumer is not paying money, but the companies providing the “free” services are leveraging the consumer’s contribution to generate revenues and profits from other sources, primarily advertising. We live in an economy based on exchange and very rarely is only one party the sole contributor to that exchange.