Tuesday, July 23, 2013

Is Your Customer Experience a Trade Secret?

Image courtesy of Marek Ślusarczyk
Last Tuesday, I wrote about my love for Starbucks while yearning for a consistent experience from store to store. Today, I drill down a bit into the root cause of these inconsistencies.

First a quick update: Despite the many tweets and shares across social media, I never heard from Starbucks. (Compare that to my posts about the American Airlines rebrand, when American's social media team followed up with me in some detail.) I did, however, hear from some former Starbucks employees.

OK, on to the story at hand. As I mentioned in the original post, I believe the issue lies with Starbucks' licensed stores. Some people have referred to them as franchised stores, but they are not; they are clearly licensed stores. Starbucks licenses the brand name (any time you visit stores in airports, grocery stores, hotels, Targets, universities, etc., you are in licensed stores) as opposed to franchising, though they state on their site that they offer limited franchise opportunities; however, it does franchise Seattle's Best. More than a third of Starbucks' stores are licensed stores - a good chunk of them are in my neighborhood!

So what does that all mean? There are differences between licensing and franchising, and I thought it would be interesting to look at those differences. In my next post, I'll compare those back to the corporate model and close the loop on the Starbucks story.

Regarding licensing, according to the Houston Chronicle's Small Business section (bold is mine):

"... businesses sometimes grant other organizations licenses to give them permission to use their intellectual property. A license is a contract through which one party grants another permission to use its patents, trademarks, copyrights, designs or trade secrets. The organization receiving the license, or licensee, compensates the licensor by paying a flat fee, royalties or a combination of the two. The agreement does not transfer ownership of the intellectual property. By licensing to third parties, small business owners can expand their businesses' reach and grow sales without having to invest in new locations or distribution networks, and risking failure."

On the contrary, from the same source, franchising is explained as (bold is mine):

"Franchising grows a business in a similar way but the franchising party or franchisor gives the franchisee permission to not only use its intellectual property but also its operating system. In addition to their trademarks, franchisees often use franchisors' distribution systems and marketing campaigns to sell the franchisors' products or services. In return, the franchisee usually pays the franchisor an upfront fee, royalties, and sometimes even a monthly or annual fee. Like licensing, franchising can help a small business grow rapidly and, although it requires more set-up and investment than a pure licensing deal, franchising remains considerably more affordable than opening new locations."

So, licensees get to use patents, trademarks, copyrights, designs, and trade secrets, while franchisees are handed the keys to the kingdom and are supported by the underlying operating systems to support the franchisee in a successful business venture.

Licensees get trade secrets. Can we equate the corporate customer experience formula to a trade secret? Or are the only trade secrets that Starbucks hands to licensees related to how to make the drinks (even though there are quality inconsistencies there, too)?
 Starbucks explains on their website (bold is mine): "Licensed stores are Starbucks stores that offer great coffee, tea and customer service; however, they are owned and managed by a licensee. Starbucks enters into licensing arrangements to provide the Starbucks Experience in locations including local department stores, hotels and resorts, college and university campuses, hospitals, casinos, airports, grocery stores and other locations."
Hmmm... that second statement in bold is the one that they're falling flat on. I think they can aspire to that, but given the definition of a licensing arrangement (and as evidenced by reality), that's about all they can do. So therein lies the problem. And the solution lies somewhere between the arrangement and the delivery. (OK, trying not to give away my next post just yet.)

Back to the franchise model. Franchisees get full operating support, and that includes marketing, software, back office, training, etc. Does that give them a leg up? It ought to. Would this have been a better approach for Starbucks - so that they could better protect their brand?

Again from the Houston Chronicle's Small Business section (bold is mine): "In a licensing agreement though, the licensor usually does not retain much control over how the licensee may operate. Unless otherwise specified, licensees can use the licensed property in whichever way they choose. Over the life of the agreement, which also tends to not last as long as a franchising relationship, licensees operate virtually independent from their licensors. Licensors in turn provide little if any support to licensees.

Franchisors on the other hand, maintain significant control over how a franchisee operates. How its intellectual property is used and how its products or services are delivered is often dictated by the franchisor. At times, franchisors even set requirements on price. In exchange, franchisors also offer more support to franchisees in the way of training, site selection and marketing.
"

From the customer experience perspective, it would seem that the franchise model is better set up for success, where success = consistency across the brand. In theory. In theory. Note that I have worked with a few franchisors in the past, and I can dispel that theory.

My experience doesn't mean all franchises are like that, but it sure makes me ask: Are either of these business models prepared to answer these two very important questions, which go hand in hand:
  1. How do you protect your brand?
  2. What are you doing to ensure that a consistent experience is delivered across all stores?
Based on what I've heard, seen, and read, neither model is foolproof. Which business model is best? Purely on the theory of which should provide the most-consistent customer experience, I would have to say the franchise model. Franchisees are supported by tools and systems that should create that consistency; on the other hand, licensees license the name and can do what they want after that (in simple terms).

I know I sidetracked a bit here by talking about the two models, but I think there's an important point here: regardless of which model you choose, or even if you don't choose either model, your customers have expectations. The brand is the (sets those) expectations. You must protect it at all costs. And by the way, your customers know your brand - they don't care about your business model. They care about the experience they (know they) are going to get when they enter an establishment with your name over the door.

Are there any brand police around for either model? Certainly for the franchise model, since they are supported by marketing tools and other systems, but it doesn't seem like it's as clear cut for licensees. Think about licensing the Superman logo for t-shirts and posters; that's essentially what Starbucks is doing, right? (OK, I'm over-simplifying.) But for such an iconic and respected (dare I say "cult") brand that should be the poster child for the customer experience - shame on Starbucks for not caring that licensees drag their brand into the mud. How are they protecting the Starbucks Experience?

Seth Godin defines brand as: "... the set of expectations, memories, stories and relationships that, taken together, account for a consumer’s decision to choose one product or service over another. If the consumer (whether it’s a business, a buyer, a voter or a donor) doesn’t pay a premium, make a selection or spread the word, then no brand value exists for that consumer. A brand's value is merely the sum total of how much extra people will pay, or how often they choose, the expectations, memories, stories and relationships of one brand over the alternatives."


In my next post, I'll get away from this business model talk and take it back to where this conversation belongs: on the customer experience. In the meantime, here are some interesting quotes from Howard Schultz, CEO, Starbucks... the last two are my favorite and the most relevant.

"To be an enduring, great company, you have to build a mechanism for preventing or solving problems that will long outlast any one individual leader."

"We believed very early on that people's interaction with the Starbucks experience was going to determine the success of the brand."

"We have no patent on anything we do and anything we do can be copied by anyone else. But you can't copy the heart and the soul and the conscience of the company."

"We look at the brand not as a piece of advertising but everything we do communicates who Starbucks is. The place, the physical environment really has become an extension of the brand and it's very important to the success of the company."

5 comments:

  1. Annette, I don't suppose it really matters if a store is owner managed, licensed or franchised.

    The issue is that the system that Starbucks are using to ensure a consistent high quality experience is missing.

    So, for the business model where it isn't working, they need to fix it.

    Or am I being a little black and white?

    James

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    1. James,

      I think it's quite OK to be black and white. In this instance, Starbucks is clearly lacking. As I mentioned, customers see the Starbucks sign above the door... they don't know or care if you are a corporate store or a licensed store. All they know is that it is Starbucks. And that is what is most important... and needs to drive the desire to fix it.

      Annette :-)

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  2. Hi Annette,
    Franchise and license based models are, I guess, all about scale and minimising investment costs as they shift the burden of investment. Does that run counter to delivering a consistent customer experience? Not necessarily, I would argue. But, I would also guess that it means that if customer experience is at the heart of what you do then to adopt models like these it is incumbent on the franchisor or licensor to male sure that they have the right systems, processes, guidelines etc in place to help their franchisees and licensees deliver the customer experience goals. If they don't do that then they are failing their brand, their customers and their franchisees and licensees. Right?

    Adrian

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    1. Thanks, Adrian. I agree wholeheartedly. Starbucks stands on (and touts) its "Starbucks Experience." ESPECIALLY if you are a brand that is known for the experience, touts it, and is a poster child for it, you can only do harm to yourself by licensing the brand and losing the ability to control how that experience is delivered.

      Annette :-)

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  3. trademark status defines many things about the company and that of the brand name.It defines whether the company is registered or not.It also defines the genuineness, reliability, quality and so on about the product and the company.

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