What customers want and need

Money (that's what I want.)

Where does one focus your innovation efforts?

The best answer is simple: You figure out (a) what your customers want, (b) what your customers don't yet know they want, (c) what neither you, nor your customers, know they want and (d) what your customers need.

Each of these answers are more nuanced than they may appear to be, and businesses therefore still get this horribly wrong. So, let's look at some examples.

What customers want

Sometimes customers are literally shouting the answers at companies, but many of those organizations simply ignore what the customers are telling them.

Loyalty schemes are very good examples. Many of these offerings are so pathetic, so badly designed, so badly run, so error-prone and have such delayed gratification schemes that they create more bad blood with customers than the good that they might bring to the organization.

There often is this type of thinking: We have a loyalty scheme because we have to have one. Everyone else has one. So, we must have one too. But our thinking is that loyalty schemes imply that customers will reduce some of our profits. So, we will make damn sure that they don't do too much of that. Or that, at least, is how it appears to me as a customer.

Shoprite came late to that loyalty scheme game, but they tried, really hard, to figure out how to make it customer-first (with Xtra Savings). Then they proceeded to win that game in only a few months. Their 50-something-week market-share gain, and Xtra Savings' contribution to that, is proof that they won.

Online ordering is another example. How many of the big companies do this from a we-have-to-be-there, so we-will-just-be-there, perspective? Their customers simply don't gain enough from their efforts. At best, the reputation of the company then does not suffer much. At worst, they then start to lose many of their in-store customers to an organization with a much better online offering. That was certainly the case when Sixty60 was the conduit for customers of retailers with inferior offerings to (eventually) move into Checkers stores via (at first) Sixty60. That also explains much of the 50-something-week Shoprite market-share gain.

What customers do not yet know they want

This is a difficult one. This means that you have to think even harder. Even so, there are many examples of companies who do this. Apple managed to do that thinking for a lot of their products and Steve Jobs said exactly that.

Sixty-minute delivery could also fit into this category.

Neither you, nor your customers, know what they want

This existence of these types of uncertainties is what underpins the bottom-up, tinkering, pivoting approach that we cover in our book about outperformance. You move first by putting something in front of customers. Then you learn what they appreciate and what they dislike. Then you pivot. Then you tinker and change some more. And so forth. And you so so at top speed.

What customers need

Let's have a much longer discussion here. (Sorry!)

We need to sketch the problem in bit more detail before we can look at the types of innovation that may be possible. So, this will get quite technical (and you may want to clock out here), but we also want to show that 'what-customers-need' opportunities often require deeper levels of thinking.

Here we go then

Customers need companies, to provide for them, those needs that they cannot provide for themselves.

Investment companies exist because most people (a) do not understand enough of the basics of investments and taxes, (b) do not have the discipline to follow an investment strategy when life happens and (c) are not emotionally able to deal with the horrific emotions of bear markets (when stock values fall) - especially the during extreme drops such as the early Covid lockdown deep dip, the 2007 crash, the dot-com crash, and others.

There are also other reasons such as our tendencies towards greed, our get-rich-quick desires, bad-actor influencers that fuel these behaviours with bullshit promises, and many more. Most people cannot invest for themselves.

People therefore need investment companies. We will criticize them below, but (given the previous two paragraphs) we are not saying that they are 'bad'. Yes, they leave you much worse off than you could easily have been if you were not prone to what is in the previous two paragraphs, but they protect you from yourself and are therefore providing for a very real need that their customers have. In that sense they are very 'good'.

Yet ...

Investment companies will almost never say that their benchmark is to outperform the market. Most of them will have benchmarks of outperforming inflation (or, perhaps, outperforming competitors).

What they then don't tell you is that very few of them significantly outperform the market over sustained periods of more than five years. e.g.: "over the last five years ... none of them beat the Satrix Top 40."

The Satrix Top 40 simply tracks the SA market's top 40 shares - and, by the way, that statement (quoted from dailyinvestor.com) is also true if the all share index is used.

These companies have to charge you for their efforts and they have to make profits. Thus, what eventually lands in your investment pocket is a measly return. Their TERs (Total Expense Ratios) and their other fees often amount to several percentage points of your investments.

Let's say that inflation is 5% and your investment provider achieved 11% growth before costs. Let's also say that their fees are 2% (and these are all very! very! reasonable figures). Now, you might look at that figure of 2% and you may think that it is not much to pay. Only 2%.

Yet, that small percentage figure amounts to one third of the very good (6% above inflation - i.e. more than double inflation) growth that was achieved. So, the investment company takes a huge chunk of the growth that they engineered for you. One third, in fact. And, again, the figures that we used here were very reasonable. Often it is half of the growth, or more. So, in most, or at least 'many', cases these figures may look a lot worse for you.

The investment industry is, furthermore, extremely regulated and they have to conform to legislation such as the Regulation 28 limits - i.e. dictates that constrain what they are allowed (and not allowed) to do when they invest your money.

Most of the investment services, discussed above, are performed through what is called 'active investing', i.e. actively trying to do as well as possible and perhaps even beat the market over a sustained period.

There is an alternative though. Passive investment providers, through tools such as ETFs (exchange traded funds), simply track indexes by buying, holding and selling with the aim to maintain portfolios that mirror the exchanges.

If one now invests through passive investing providers (such as Satrix and EasyEquities), and you then follow a dollar-cost-averaging strategy (which essentially, practically, means investing every month) and you follow a buy-and-hold strategy (i.e. you don't sell), with perhaps also an occasional re-balancing strategy (i.e. keeping the percentages, that you want where you want it, fairly stable), you will do much better (over a 'long' period of - say - more than 5 years) than you will have done through the investment providers.

The active investing providers disagree with the previous sentence, but the figures show otherwise.

Look, for example, at a very simple portfolio of 35% of your money in Satrix RAFI 40 (9.45% annualized performance over the last 5 years in rand terms - at the time of writing this), 40% in MSCI World (up 19.13%), 15% in S&P500 (up 21.8%) and 10% in Nasdaq (up 28.74%). And 'annualized' means that these growth figures were per year. These gains compound.

That is a helluva lot better than the dailyinvestor.com link showed. Massively better. And, that portfolio is in line with what academic research says one should do.

We will bring one last consideration into this discussion, namely taxes. If one invests in Retirement Annuities, you can (up to certain maximum amounts) subtract those amounts from your earnings and therefore pay less tax.

We have needs though

Because of who we are though, namely flawed Homo Sapiens beings, most of us will be better off if we ask the investment companies to do the investments on our behalf. And many of us are also forced into doing so through mandatory company retirement-type schemes and other such dictates.

So, we have to settle for shitty outcomes.

Clearly there are possible opportunities here for investment companies to provide us with better options to satisfy our wealth-building needs.

There is already at least one such option, namely 10X Investments. Their approach is simply to do the types of low-cost passive investments that we covered above. They claim that they can provide you with much better retirement outcomes and their claims are backed up by facts. Yet, they are still very far below many people's radars. Why?

Is it their marketing, or is it because they are owned by the active investment industry and that 10X may just be a defensive strategy for them (i.e. if that type of investment gains ground they are well positioned there). Or is it because we have been 'indoctrinated', for so long, that there really is no choice - and we don't trust the fact that we have choices.

Opportunity?

There has to be an opportunity here for someone to do better.

So, now, after all this, we have hopefully made the point that there are always opportunities for more innovation (even if we are wrong with our example, and we don't believe that we are).

The investment industry, in this country, is definitely not optimally positioned to satisfy its clients' needs. The above arguments should have made that very clear. They are, in many ways, still stuck in the 1980s (before Nate Most, John "Jack" Bogle and others showed the way) There simply must be more opportunities for innovation in this industry.