Frontier Exclusive Visionary Interview for hardware, software, system related business and and academia


Frontier Journal (FJ) Typically what customers want is maximum benefits on products and/or services with zero cost; while vendors, as business as a for-profit-organization, attempt to generate maximum profits with minimum operation cost, how to resolve the inherent conflicts between vendors and customers?

Don Peppers (DP): This is looking at the customer-vendor relationship from the wrong perspective. In older times, when manufacturing and information technologies were incapable of any form of variability, then yes, marketers made things and customers either took them or they didn't. It was a zero-sum game in many respects, with whatever dollars the customer took off the price coming directly out of the profits of the vendor. But because of new technologies, vendors and customers can interact with each other more cost-efficiently, and manufacturing and service delivery can be more tailored to individual customer needs.

So the type of customer-vendor relationship we see much more often today is one that is based on trust and mutual benefit. My customer interacts with me and tells me what he wants, possibly online, or perhaps by phone, or by communicating with a sales person who has access to a CRM-enabled sales force automation tool. I then change some aspect of my service or product to meet the customer's need, and we interact again. I ask him: "Did you like it that way? OK, next time we can do it like this, or like this..." The point is, with every interaction the customer becomes more loyal to me, because the interaction develops a context that is difficult for him to reproduce somewhere else. The customer would first have to teach another vendor everything he's already taught me. So a relationship built on interaction and just a bit of customization can create an immense incentive for a customer to remain loyal, and to work through any problems he has with the vendor in order to continue the convenience of not having to completely re-specify his preferred type of service or product.

An easy example frequently used is Amazon.com. If you are a regular Amazon customer (as I am), then when you see a book you like you just click on it and it comes automatically to your house. Amazon already has your address and your credit card number, so it's very easy to order the book. For any given book, you will almost certainly find it cheaper somewhere if you look hard enough. But that would mean re-entering all the information, and if you feel that Amazon's "recommendation" service has any value at all, then buying the book from some other site will erode its effectiveness.

FJ : Precision-based Marketing such as 1-to-1 Marketing with customization and personalization in mind gains its momentum nowadays as prospects and customers have much more choices than that of in old days. How can we reduce the cost overhead introduced by 1-to-1 Marketing as opposed to traditional marketing?

DP: If you base your service of many different customers with different needs on the principle of pre-manufacturing all the possible products and choices they will want, then you will indeed go bankrupt. And you deserve to.

We do not advocate this foolish idea. What we suggest is that you should apply the principles of mass customization. Modularize your production or service delivery process, in ways that allow you to add more and more modules. Then, it is the digital combination of those modules that creates thousands - or millions - of choices.

We know a credit card company that offers its card in more than 2 million varieties. These are all the possible results of combining just five different modules. Each module (interest rate, annual fee, sport team affiliation, reward structure, etc) has a dozen or more possible "settings." When you multiply the possibilities together, the card can be delivered to any particular customer in more than 2 million ways. But actually, the only thing the card company is doing is specifying a few dozen options. Then the technology of interaction and process management digitally combines different options into the final card product.

In most such situations, the actual cost of delivering finished goods to the customer will be less - sometimes very much less - than standard manufacturing. For instance, HP no longer makes separate printers with their own individual power supplies for each different region of the world, for instance. Instead, the company makes a single printer engine that can accommodate a number of different power supplies, then it ships these engines to their destination where the final power supplies are installed. HP did this to save costs. The increased cost of a "standardized" printer engine is more than offset by the reduced inventory costs and wastage of all the separately manufactured machines that could not be transferred from one region to another.

The same kinds of cost savings apply to service delivery. St. George Bank in Australia has cash machines that remember customer requests. So you put your PIN code in and the machine might ask you "would you like your 'regular' $100 cash, no receipt?" Just push "yes" and you are finished. No need to step through the series of questions - deposit, withdrawal or transfer? - checking or savings or money market? - receipt or no receipt? From the customer's standpoint it is much more convenient to be served individually like this. But from the bank's standpoint it's less costly, too, because each ATM can serve more people in the same amount of time.

FJ: To meet customers' expectation is any business' prime goal, since it is customers who offer you the life blood. How to help customers to set their realistic expectation instead of irrational one? When and how shall we say NO to which kinds of customers?

DP: Knowing which customers you lose money on - and the ones you will probably never make money on - is a critical part of any customer strategy. After all, the essence of "strategy" is not what you decide to do, but what you decide you won't do.

Sometimes, because of the structure of your industry or your distribution network, or simply because of the type of market you're dealing with, you will have to cope with very powerful customers - customers who have a great deal of negotiating leverage in their relationship with you. Customers like this can demand and get highly favorable terms, in the form of lower prices, better services, priority delivery, and so forth. Occasionally such customers are so powerful that they may all but require you to lose money just to serve them.

In retailing, the giant mega-stores and category killers, such as Wal-Mart and Toys-R-Us, are very tough customers. In the high-tech field, companies that manufacture components in mature markets, like microchips, must sell to tough customers like Dell, or Hewlett-Packard. In the automotive category, almost all of the manufacturers are large, difficult to deal with, and obsessively concerned with price.

It's important to keep your perspective when you must serve customers who are "oppressive" but still necessary. In the first place, you can only make rational decisions with respect to such relationships if you actually do a good job of tracking your customers' actual and potential values across your entire customer base. This means not just annual customer profitability, but some forecast of customer lifetime value as well, along with an estimate of growth potential - for all your customers, not just the largest, most powerful ones.

FJ: What is your perspective on innovation on Customer Relationship Management nowdays?

DP: You could make a strong argument that innovation has been the single most important driver of business success since before the assembly line, yet it has just recently become one of the hottest buzzwords in the business world, and nowhere more so than in the marketing discipline. Business observers seem to be paying more attention to innovation today partly because the hottest companies are truly innovative (think Apple, Tesco, Google, Zara, Intuit, Nokia, or GE, for example). But in addition, it's now clear that innovation is the only way a company can have any hope of meeting the relentless demand for financial growth and profit that characterizes today's increasingly fast-paced information economy.

The marketing function is smack dab in the middle of the innovation issue because customers have a great deal to do with it, and CRM now puts companies in closer touch with their customers than ever before. For any innovation to contribute to a firm's economic success, it must address a customer need. And customers, who wear the same type of product blinders as businesses do, aren't always very good at recognizing or explaining their unmet needs. Xerox photocopying met a tepid response from secretarial personnel who thought carbon paper was pretty good, thank you very much. IBM missed the first wave of the PC revolution because its mainframe customers (mostly IT department heads at large firms) saw no need for them, since the mainframes were so capable. Henry Ford famously remarked that "If I had listened to what people said they wanted, I would have designed a faster horse." Nevertheless, no business innovation can succeed unless it meets a customer need on some level, and truly creative innovations often meet needs that customers don't even realize they have until they are confronted with the innovation itself (think about the Worldwide Web, ATMs, cell phones, disposable diapers, or car navigation systems).

But actually, customers play an even more important role in marketing innovation - a role that goes beyond consuming new products and services. In my opinion, a firm's general attitude toward its customers is strongly linked to its inclination and ability to innovate at all. Research has shown that innovative organizations tend to have vibrant, energetic, and purposeful employee cultures. An IBM survey in 2005 asked 750 global CEOs where their innovative ideas came from. Forty-one percent said employees, 36% said customers, and just 14% said traditional R&D. (Booz, Allen studied a number of companies across different industries and found no correlation at all between R&D spending and successful innovation!)

Successful marketing innovation occurs when the employees of a firm try to solve problems or remove obstacles related to their purpose, as an organization. In a purposeful company the employees have a "sense of mission" that goes beyond simple profit or shareholder value. Employees in such an organization are eager to break down walls and overcome barriers when necessary to accomplish the mission. They're not just out to make money. They want to change the world. Innovation is simply the most direct means to that end, and making money is a happy side effect.

Consider: If your mission is to sell a previously defined set of products, then your employees will have difficulty removing their product blinders, and the culture will cause them to shun innovative ideas. But if your employee culture encourages people to constantly look for ways to increase the value they can deliver to customers, then your firm will be more receptive to innovative ideas designed to achieve that goal, even when those ideas might create a business that disrupts or stands completely outside of the current one.

FJ: We all understand that as business, we should always balance between the short term interest and long term interest when serving customers, as you call it for the sake of the Return of Customer as opposed to that of ROI. Now how to strike the balance between the short term interest and long term interest in general?

DP: Even if you have no hope of trying to understand how your current actions change the lifetime values of your customers, you can still base your business on earning the trust of customers, and being willing to give up short-term profit when necessary to protect the interest of a customer. Simply creating a company that customers and prospective customers feel will always "do the right thing" by them will set your firm on the path to balancing short-term and long-term. ROC is simply the metric that helps to quantify the actual financial benefit of this path.



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