SELLING TRASHY NOVELS AND BANKING

A funny thing happened on the way to the internet. During the early 90's, it was a commonly held belief that the internet would bring greater price competition and reduce margins to the absolute minimum. Perfect information, lower transaction costs, shopping "bots" were all supposed to commoditize even the most illiquid product. The funny thing is – it is simply not true. Take Amazon.com. for example. Their prices are oftentimes the lowest in the industry, yet they enjoy some of the widest margins. Further, if you look at the amount of competition (judged by the number of online booksellers that offer a particular book) and price, there is very little correlation. Often, books that are bestsellers that have the most competition have the widest standard deviation in price. Take one of our favorites, Danielle Steel's new trashy novel, Bungalow 2, about a San Francisco housewife that spreads her wanton desires all over Hollywood and wins an Academy Award in the process. A quick internet search shows that book priced between $17.11 and $27.00 for a 58% difference. That is more of a difference that we find in physical bookstores in downtown San Francisco that had prices between $17.82 and $20.96 for an 18% difference. The takeaway here is simple – stop complaining about loan and deposit pricing and do something about it. O.K. this, seems a little harsh, and maybe we need a weekend to relax, but we are serious about this. Booksellers, we would argue, face more competition than banks, yet they enjoy a less homogenous price spectrum. This occurs because online booksellers have successfully differentiated themselves (because they had to) in order to garner better margins. Some booksellers choose to be low cost providers, while others pride themselves on service, selection and delivery. For that matter, others, such as Barnes & Noble.com, have a pricing strategy that places them in the middle of the pack, but they differentiate themselves by spending more on marketing and advertising. The most successful booksellers have chosen to pick a limited group of titles (usually the top 10 bestsellers) to discount and compete on price. From there, they market these books, in order to hook the buyer and then spend their marketing budget trying to cross-sell into higher margin books. Customer segmentation, reward clubs, online profiling and one-click purchasing all help to deliver in grabbing that price sensitive buyer and attempt to convert them to service. Purchase a book from Amazon and it often comes within 24hours. The service is fantastic. The reality is that, despite the marketing hype on the site, Amazon is not the lowest priced provider and very few of their selections are pitched on price. The other category of successful booksellers is those that go after a niche market. Pet owners, minorities, Republicans, firemen, car enthusiasts and ham radio operators all have specialty booksellers that maintain high margins that cater to a particular clientele. The same principals that booksellers use also work in banking. As an industry, we need to do a better job at marketing, sales, pricing and execution in order to deliver a superior value proposition. That is enough ranting from us, we are going to take some time off and catch up on our mind-candy of a novel.