UsableMarkets

Today’s NY Times has this piece in the Business section: Put Buyers First? What a Concept. In many ways it is a typical focusing-on-the-customer -experience-makes-for-better-business story. It seems almost passe in the UX world to cite these things – there are many examples, from Apple to Zappos – but it is a good story.

First, there is a pretty good quote from Jeff Bezos:

“And the reason I’m so obsessed with these drivers of the customer experience is that I believe that the success we have had over the past 12 years has been driven exclusively by that customer experience. We are not great advertisers. So we start with customers, figure out what they want, and figure out how to get it to them.”

Then the obligatory slamming of Wall Street by the author of the article (Joe Nocera):

But I couldn’t help wondering if maybe there wasn’t something else at play here, something Wall Street never seems to take very seriously. Maybe, just maybe, taking care of customers is something worth doing when you are trying to create a lasting company. Maybe, in fact, it’s the best way to build a real business — even if it comes at the expense of short-term results.

But then there’s this interesting little quote from Bill Miller, an investor:

Legg Mason’s legendary fund manager, Bill Miller, who has made a small fortune for his investors by betting big on Amazon, told me that “Wall Street is almost fanatically focused on margin expansion and contraction.”

Reading it, one has to wonder, what exactly is “margin expansion and contraction.” And why is Wall Street “fanatically” obsessed with it?

First, it helps to know that margin, in this context, is actually shorthand for profit margin. And then using our handy little dictionary we see that profit margin can be defined as:

Net profit (total expenses subtracted from total revenue) after taxes divided by total amount of sales for a given 12-month period, expressed as a percentage.

Got that?

A simple way to think of it might be this. Lets say I sell $100 worth of widgets in one year. This is my total sales for the year.

In addition, lets say that after paying my employees, my taxes, the land lady, and so on, I have $10 left over. This $10 is my net profit.

If I divide this profit ($10) by sales ($100) I get a profit margin of 10%.

Wall Street analysts look at this number – 10%, in our example – as a way of understanding how efficient a company is. And in case this has escaped you, Wall Street wants companies to be as efficient as possible, since this means a greater percentage of sales revenue is going is to the owners, many of whom live on Wall Street.

Consequently companies face a lot of pressure to improve their profit margins, and improving profit margins usually means achieving the same (or greater) amount of sales with less. Less customer service, less investment in usability, less investment in R&D, and so on.

Every company faces this same challenge: how much to invest in growing sales and keeping my customers (and employees) happy, versus how efficient can I be. Wall Street favors efficiency (although they like growth, too). Customers and UX professional (since we get paid to help improve user experience), clearly prefer a focus on keeping customers happy. It’s our livelihood, after all.

But putting selfish concerns aside, how a company resolves this question says something about the kind of company they want to be. Jeff Bezos has clearly stated his position. On the other end is Wal-Mart. Both models clearly work. But where would you rather shop?

As always, thanks for listening.
~alex