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Customer Centricity

Name: Customer Centricity
Author: Peter Fader

Peter Fader

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eBook - ePub

Customer Centricity

Peter Fader

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Publisher

Wharton Digital Press

Year

2016

ISBN

9781613630150

Chapter 1: Product Centricity: Cracks in the Foundation

zbsocialdurrrm 9781613630150 182673

In this chapter:

What is product centricity?
Why are there cracks in the foundation of product centricity?
Why does being customer friendly fall short of being truly customer centric?

What Is Product Centricity?

What is the primary objective of every company in every sector and every marketplace in the world?

Well, the answer is obvious, isn’t it? The only reason anyone goes into business-the only reason any commercial enterprise exists-is to make a profit and to maximize those profits over as long a time period as possible. We are in business to make money. Preferably, a lot of it. And broadly speaking, for the better part of the past century, all companies have used the same general strategy to achieve that goal. That strategy can be termed “product centricity.”

Ever since Henry Ford introduced the world to the wonders of the assembly line, companies of all kinds, even service firms, have followed that same path to growth and profitability. Ford’s model-the product-centric model-worked. And it worked because of the virtuous cycle that underpinned the entire thing. As Ford understood when he unveiled the Model-T back in 1908, and as companies today still understand, the more products you sell, the cheaper it becomes to manufacture those products, which means you can make more products, sell more of them, and make even more money.

The product-centric model is precisely what the name suggests. Organizations that follow this model are literally built, from top to bottom, around the demands of the product:

All strategic advantage is based on the product and the product expertise behind those products.
Divisions and teams are set up around products.
Employees are rewarded based on their ability to create new products or sell existing products.
The long-term focus is about strengthening the product portfolio and constantly finding new ways to expand it.
The brand is perceived to have greater value than the customer.

Create a product, market a product, sell a product. Repeat.

It’s a time-tested and well-proven approach to business, so it’s no surprise that 99% of companies on the planet still operate this way today. It doesn’t matter if they are selling widgets or consulting services or plastic surgery or education; most business executives view the world through the lens of product centricity. It’s hard to blame them. Indeed, as Apple, Walmart, and Coca-Cola prove, the product-centric ways of Henry Ford can still deliver the profits. Product centricity can still win your company massive market share. Product centricity can still make your company a global powerhouse.

And here’s the thing: Product centricity is pretty simple.

Profits are maximized through volume and market share, and volume and market share are driven by growth-growth derived, generally speaking, in one of two ways. Companies can either expand their reach into new markets-demographic, geographic, or otherwise-or they can tweak an existing product just enough to convince their customers that version 2.0 really is that much better than version 1.0. The viability of the former method is self-explanatory. And although the latter is a bit more complicated, it continues to be a proven winner as well. Consumers like the new and improved. They like the latest. And companies are happy to deliver precisely that, especially when it is highly cost effective to do so.

So yes, market expansion works. New product development and line extensions work too. And as a result, product centricity works. Through the proven, reliable, and very much alive-and-kicking product-centric approach, companies are achieving exactly what they want to achieve: profits. In some cases, they are achieving enormous profits.

Take a look at Apple-possibly the most successful product company in existence today. Despite the continued health issues faced by Steve Jobs, the company’s founder and creative force, Apple kicked off fiscal year 2011 with the single-best quarterly performance in company history. Apple sold 4.1 million Macs that quarter (nearly 25% more than they had in the previous year) along with 16.3 million iPhones, 19.45 million iPods, and 7.33 million iPads. Revenues reached $26.74 billion. Profits topped $6 billion. Revenues were up 71% and earnings were up 78% from the previous year. Right now, Apple is dominating its marketplace. A recent study by the marketing research firm Millward Brown estimated that the Apple brand is worth over $150 billion. Who can argue with that kind of success?

In that sense, Jobs and the powers-that-be in Cupertino, California, have no reason to change. No reason at all.

At least not yet.

Why Are There Cracks in the Foundation of Product Centricity?

I have two teenage children, so I can speak with authority when I say today’s kids are spoiled. They are the most demanding generation the world has ever seen. They know exactly what they want, and because they have no patience whatsoever, they want what they want immediately. And they don’t care how they get what they want, as long as they get it when they want it and in the format they want it.

The lesson for your company is obvious. Maybe you’ve got these kids as customers today. But unless you are prepared to meet their every demand tomorrow, they may not be your customers for long. In the parlance of sports, these kids are “free agents.” Their loyalty extends as far as their next passing whim.

In this regard, the modern teenager is quite emblematic of the changing face of the business world. It is a business world that, in my view, is becoming less forgiving of the product-centric model and more demanding of a customer-centric model-a model based not on expertise in the realm of product development, but rather on a deep understanding of what customers actually want, when and how they want it, and what they’re willing to give you in exchange.

The rules of the game have changed, and consumers hold far more power than ever before in today’s ultracompetitive business environment. Make no mistake: although the product-centric model is not quite broken, there are certainly some cracks in the foundation. Those cracks can be traced to four key factors:

Technological advances and the speed with which new technologies are created and copied.
Globalization and the geographic advantages that have been lost as a result.
Deregulation and the way it has shaken up traditionally stable industries.
The rising power of the consumer and their newfound ability to get what they want, whenever they want, from whomever they want.

These trends have reshaped the world of business-and they should not be ignored.

For the better part of the past century, a well-run product-centric company essentially operated with a stacked deck; they enjoyed an inherent strategic advantage specifically because of their product expertise. If that company had superior technology, their market share was fairly secure. And if that company had locked down their geographic marketplace-or at the very least was located far enough from would-be competitors to make their competition irrelevant-their position was even more secure. These days, neither advantage truly exists. At least not in the way they used to exist.

Because of the near incomprehensible pace of technological advance these days, and because of the spread of technological knowledge to all corners of the globe, there is a much smaller technological advantage in business than ever before. Whatever you invent today can be knocked off tomorrow. So whereas it used to be true that a top-performing product or a truly cutting-edge technology could reign supreme, without competition, for years and years, that window of dominance has been shaved to months, weeks, and even days. This trend is probably most prominent in the computing space, where it is both clichéd and undeniably true that a computer is obsolete almost from the moment it is purchased.

Meanwhile, globalization-the borderless reality in which business operates today-has wiped away almost every company’s geographic advantage as well. Those ever-more demanding consumers of today have good reason to be demanding; the entire world, and all of its goods and services, is now at their fingertips-and where a product is manufactured is essentially irrelevant. The product from China is as available to them as the product from their hometown, and in this sense, every company, no matter where it’s located and no matter what its business, is competing in a truly global marketplace.

Everything is now everywhere, all at once. Consumers are smarter than ever before. The market is more saturated than ever before, more competitive than ever before, and changing more quickly than ever before. It is the perfect storm, and it explains why today’s teens-and many adults-are so demanding: they can be. Because of technology and globalization and deregulation and the sheer speed at which business can and does get done, we have gotten to the point where consumers have all of the choices-and by extension, all of the power. So although I can justifiably be frustrated by just how easy my kids have it these days, the reality is that they have every right to be demanding. The market has declared it so.

So where does this leave product-centric companies? Well, in my view, it leaves them vulnerable. Or at the very least, more vulnerable than ever before to their competition-competition that is coming at them from all angles, on all fronts, and from every corner of the globe.

Which brings me to one last important change in the world of business. Just as technology has made life more difficult for businesses, so too has it created wonderful new opportunities. When Lester Wunderman, that underappreciated genius, literally coined the phrase “direct marketing” back in November of 1967, he had little to work with. He had his ideas. He had customers. And he had a bunch of pens and a few stacks of index cards. That’s about it. Any information that Wunderman or his clients collected about their customers had to be gathered the old-fashioned way-by putting pen to paper. Wunderman taught client firms how (and why) to document every point of contact between the direct marketer and its customers, and he slowly but surely built what must have seemed at the time to be a fairly enormous database.

Today, that same database can be built in a few keystrokes. Today, for the first time in history, companies can collect massive amounts of data-once unthinkable amounts of data, really-about their customers. Important data. Actionable data. They can know what their customers buy and when they buy it and where they buy it and more. The data are there. And you know what? Some really smart companies-Amazon being possibly the most notable example-are leveraging that data, often with enormous success.

This data explosion is the last crack in the foundation and possibly the most important reason why the product-centric model is imperiled. Customer-level data are more available to you today than ever been before. And if you don’t use it, your competitors will.

Why Does Being Customer Friendly Fall Short of Being Truly Customer Centric?

Starting in the next chapter, we will begin to explore exactly what customer centricity is-its definition, the organizational and cultural changes that it demands, and why I believe this new model really is the future of business. But first I should draw a line in the sand and explain, once and for all, what customer centricity isn’t. This is an important distinction to make.

I now teach a regular course on customer centricity at the Wharton School, and in the first lecture of each semester, I put my students through a little exercise. Right after I explain what product centricity is, and right after I explain why I think product centricity is more vulnerable than ever before, I play a little trick on them. I put up a slide that lists five companies known far and wide for their customer orientation: Nordstrom, Walmart, Apple, Costco, and Starbucks. Then I run down the list, one by one, and poll students on whether they believe each company is customer centric. The responses always amuse me because each and every semester it becomes readily apparent that even the brightest students all too easily confuse customer service with customer centricity.

When that slide goes up, my students extol the customer-friendly virtues of Starbucks. They rave about how Walmart and Costco can deliver just about any product on Earth at precisely the right price to their customers. They speak in mild awe about storied old Nordstrom. And of course, they agree pretty much across the board that Apple-beloved, trendy Apple-loves its customers almost as much as its customers love Apple. And then they look at me in great bewilderment as I inform them that none of those companies is actually customer centric. Not customer centric enough, at least.

Let me explain why.

Let’s start with Walmart and Costco. Walmart now has nearly 9,000 stores in 15 countries around the world, and Costco reported revenues of nearly $9 billion in 2011. Although Walmart and Costco are undoubtedly successful, they aren’t customer centric; the reality is that despite their massive sales numbers and retail sector dominance, both companies are flying blind when it comes to their individual customers. Their model is utterly and completely product centric, even though they don’t make their own products. Both retailers stock their shelves full of products-an unmatched variety of products-and then sell them cheaper than almost anyone else can. That’s about the extent of it. And yes, it has worked out fairly well.

But how do these firms collect and leverage customer-level data? How well do they sort out their best customers from the rest of the pack? Not particularly well at all. In fact, they don’t even try to do so. Are you a member of the Walmart loyalty program? Of course not; they don’t have one. Why? Because it wouldn’t be cost effective for them to take on all that overhead. (This is also true for many other retailers who do have loyalty programs, but that’s another matter.) Walmart is very good at knowing which kinds of products should be sold in which geographic areas at which times, but they have no idea about the wants and needs-and lifetime value-of any individual customer. One notable exception is their Walmart.com subsidiary, but this division is a small part of the overall company, and they are gen...