Chapter Twenty Nine

Focus on the Customer Part One

We have discussed traditional methods of conducting business, particularly for strategies associated with performance superiority or operational excellence. We also have reviewed the different characteristics of businesses with a product-centricity strategy and focused on businesses that are moving toward a customer-centricity strategy. Companies such as IBM, Harrah's and Tesco are examples of companies that are highly customer-centric. How do we determine whether a business really is or isn't customer centric? In other words, what is the definition of customer centricity? “Customer centricity means that you’re going to be friendly, provide good service and develop new products and services for the special focal customers — the ones who provide a lot of value for you — but not necessarily for the other customers. You pick and choose. Some customers deserve the special treatment, and if others want to buy from you, that’s great, but they are not going to be treated the same.” Retrieved from an interview with Pete Fader Peter Fader on Customer Centricity and Why It Matters
One of the gurus of customer-centric strategy is Pete Fader, Wharton marketing professor and co-director of The Wharton Customer Analytics Initiative. He is also the author of the book “Customer Centricity.” In this video, he provides further insights on Customer Centricity.
The profound idea in the customer-centric business world is having a select set of customers. Because the product-centric world is dependent on generating as much revenue as possible by selling as much volume as possible, a select set of customers does not exist. The whole idea of having and emphasizing a select group of customers runs against the grain of many businesses. In addition, minimizing costs becomes challenging when businesses are selective as it involves maximizing the long-term financial value of certain kinds of customers. Given the pressures of Wall Street, and just the conventional ways of doing business, for most companies it is difficult to be selective. The concentration in the product-centric world is short term in order to meet or exceed the quarterly numbers. Whereas in the customer-centric world, the emphasis includes investing in the right customers. At times it may require a loss of revenue by recommending the products and services of competitors. In the IBM example, they lost opportunities by recommending products and services of others. They were willing to lose profits in an effort to lock in customers for the long run and establish themselves as trusted advisors. The assurance of long term profits was more important than the next immediate sale.
The customer-centric approach, the radically alternative method of conducting business requires aligning research and development activities around the customer. Generally, the research and development team is asked to develop the next blockbuster idea. Because the concentration is on the valuable customers, they are asked to create something that will assure the customers stay locked in. To create something that will convert into a long-term value. Something that will help the company recruit even more valuable customers. This is an extreme approach as it represents a completely different way of conducting business. This last point may not be quite as radical as it sounds because after all, companies acquire valuable customers as a result of the products and services they sell. Chances are that those same valuable customers will love whatever the research and development team creates next. The idea of approaching the research and development team and putting those valuable customers front and center changes the conversation, and perhaps the design within the organization.
When a company begins moving towards a customer-centric approach, it entails more than simply adopting the term or placing a big banner on the lunchroom wall for all employees to see. Embracing the definition and changing the mindset of the company may include some challenges. As customer centricity requires companies to operate with a forward-looking approach, the focus is on which customers will be valuable using the data, models, and technology available to the company. Little emphasis is placed on which customers have been valuable in the past. To further illustrate, many companies have some kind of salesperson of the month incentive and they tend to be backward looking. In this concept, salespeople are rewarded based on how much they sold last month, last quarter or last year. In the backward-looking program, salespeople are rewarded for closing sales that were guaranteed sales. Furthermore, most salespeople receive a bonus if the sales quota is made before the month ends. This type of thinking does not necessarily help the company in the long run. Companies must be forward-looking in order to have substantial long-term benefits.
We have discussed the definition of customer centricity and touched on some of the challenges that it requires companies to meet when changing their centric structures. Let's review all the aspects of living in a customer-centric world. First, what is the overarching objective for commercial enterprise in a customer-centric world? A number of customer oriented answers come to mind including building loyalty, creating satisfaction, and generating sales. All these objectives are important in a customer-centric approach yet not one of them stands out as the single overarching objective. Maximizing shareholder value serves as the predominant objective. Just like a product-centric company, maximizing profits in both the short and long-term and recognizing the time value of money, serve as the primary objectives in a customer-centric structure.
The overall objective of any commercial enterprise is to make as much money as possible. Many mistakenly believe the money-making objective is uniquely associated with product-centricity. Like product-centricity, customer-centricity has the same over-arching goal of maximizing shareholder value. Achieving that goal using a customer-centric approach is in many respects quite different from product-centricity. Following a customer-centric path may actually help companies reach their goal faster and with better results.
Before discussing the customer-centric formula, let's review the principles of product-centricity. For most firms, including the performance superior ones and the operationally excellent ones, it is about coming up with a blockbuster idea. The mass production of that idea in a quick and efficient manner. Once that is accomplished, the company begins brainstorming the next blockbuster idea to produce. This formula has worked for so many companies and still works today. What is the formula in the customer-centric world? Customer heterogeneity

Differences among people, either in terms of observable characteristics, such as demographics or behavior, or in terms of unobservable characteristics, such as preferences or purchase intent.

is what is celebrated in the customer-centric world. Customer heterogeneity may be a subtle point but it is very significant as it reveals that notnall customers are created equal. To elaborate, it is the idea that some customers are just inherently much more valuable and much more profitable than other customers. In the past, companies did not know the profitability of customers. They did not understand how customers were different from each other, nor did they care.
Companies were intent on just pushing products out the door. Once they began realizing the differences in customers, it became a nuisance to them. The idea of approaching their diverse customers in different ways including developing alternative products for them was considered a real hassle. It also added cost. Unless companies decide to limit their potential and work solely with one kind of customer, it is imperative to celebrate customer heterogeneity.
This concept implies that customer differences exist and the more companies learn about their customers, the easier it is for them to find the kinds of customers who can be very valuable to them. At the same time, they strive to take into consideration the profitability of their customers. Adrian Slywotzky and David Morrison recommended in their 1997 book, The Profit Zone; “Understand what's most important to the customer and where your company can make a profit with them; then work to gain market share in that finite arena.” When companies concentrate on heterogeneity and the profitability of their customers, future profitability comes into focus.

A review of past profitability serves as a useful guide in determining future profitability. Companies use their data, models, and technology to project the future value of their customers. As a result, the celebration of heterogeneity includes not only what customers have been worth and which customers have been the most valuable, but which ones they believe will we be most valuable in the future. The idea of customer lifetime value is defined by the value that will be created and extracted in the future. How is customer lifetime value (CLV) measured? When we consider a company as it starts changing from being product-centric to customer-centric, what kinds of tactics change?

Customer acquisition, customer retention, and customer development are the three tactics that make it possible for companies to potentially make more money being customer-centric than product-centric.

How much should you invest in marketing to sell a $20 pair of socks?

It’s a textbook marketing question, and the classic answer is based on Return On Ad Spend (ROAS). If your ROAS is 4:1, then you can spend up to $5 to win the sale. But what if that moment isn't really about selling socks but about acquiring a new long-term customer? What if that sock shopper had also been browsing expensive suits on your website and is using an $800 smartphone? How much should you spend to acquire him then? Customer-centric marketing offers some terrific new ways to understand the potential lifetime value of your customers. Instead of focusing on isolated sales transactions, you can now invest in attracting and retaining the people who will bring your brand the most value in the years to come. Learn more from this Google Think article. Three Secrets of Customer-Centric Search Marketers

For the marketing department, customer acquisition, retention, and development have become almost as important as some of the branding ideas. In place of the organization centered solely around different kinds of products and services, ideally the whole organizational chart, will be centered around different kinds of customers.
In general, it is extremely difficult to stay ahead of the competition when it comes to product expertise. In terms of relationship expertise, there are meaningful, sustainable long-term advantages. This does not refer to a soft, gushy, emotional generic understanding of customers. A clear-cut understanding of customers involves data, models, and forecasts. The beauty of collecting data and developing forecasts is that they cannot be copied and can never become commoditized. Celebrating customer heterogeneity leads to an even deeper understanding. For companies whose customers are assets, an investment in data, knowledge, and heterogeneity will lead to better results than for those who are just pure product-centric.
The final point we will examine is how customer-centricity encompasses conversion thinking which includes the following thought-provoking questions: How do we bring more value to the customers? What products and services can we develop? What information can we provide? What can we do in the relationship to create and extract more value for the really valuable customers? Moving from a product-centric world to a customer-centric world is rather arduous as changing from divergent to convergent thinking does not occur overnight. Making the change requires a number of different incentives. It also requires a diverse group of people with a completely different mindset. This is just one example of the challenges associated with customer centricity.
For more insight on product-centric and customer-centric companies read: Designing the Customer-Centric Organization: A Guide to Strategy, Structure by Jay R. Galbraith. An excellent review of the book can be found on Google Books by searching for; “product-centric versus-customer centric organization.”

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