Home > Digitalizacija > Nicolaj Siggelkow, Christian Terwiesch: Connected strategy, Building Continuous Customer Relationship for Competitive Advantage

Nicolaj Siggelkow, Christian Terwiesch: Connected strategy, Building Continuous Customer Relationship for Competitive Advantage

The key innovation of connected strategies lies in their revamping of a firm’s business model. At a time when a mobility platform is valued more than some if the biggest car companies in the world, increase in connectivity can often be seen more as a threat than an opportunity.

Traditional interactions start when customer realize they have an unmet need. Customer then figure out how they want to fulfill this need. At some point, customer attain a level of knowledge that sparks action to put some money on the table. Firms sit on the other end of these traditional transactions. In traditional interactions, firm work hard to provide high-quality products and services as quickly as possible and at a competitive cost. Moreover, there often exist a gap between what the customer wants and what the firm provides.

Connected strategies have two key elements: a connected customer relationship (that have elements recognize, request, respond and repeat) and a connected delivery model (with connection architecture, revenue models and technological infrastructure).

If the first three elements (recognize, request and respond) are important, it is with repeated dimension of customer interactions that companies achieve sustainable competitive advantage. Repeated dimension gives company ability to learn from existing interactions in order to shape future ones. It also helps firms learn on a level of particular customer and on population-level learning.

There are four different types of connected customer experiences:

  • Respond-to-desire
  • Curated offering
  • Coach behavior
  • Automatic execution

Once we now what type of connected relationship we want to design for our customers the question is how to implement it. At that moment we think about delivery models.

Connected strategy can create value without being a platform. Platform business are not directly involved in serving customers by providing them with goods or services. Instead their focus is on connecting the producers and customers of such products or services. Platforms are particular type of what we call connection architecture. They provide platform for payment, trust building and dispute resolution and decrease demand for providers to enter into market. On most platforms, the relationship between customers and providers is primary transaction one, and the revenue model of the platform is to take provisions on that these transactions. Connected strategies aim for long-term relationship and they want to avoid transactional pricing.

When we talk about connected architecture, there are five main types, that are used across industries:

  • Connected producer
  • Connected retailer
  • Connected market maker
  • Crowd orchestrator
  • Peer-to-peer network creator

In order to have better overview we can use connected strategy matrix, that can serve as a framework for systematically cataloging the various activities of your competitors or as innovation tool to create new ideas for your own business.

If we want to describe connected strategy, we can say that it is a set of operational and technological choices that fundamentally changes:

  • how the firm connects to its customers by implementing the recognize-request-respond-repeat loop, which transform episodic interactions into continuous relationship with low friction and high degree of customization and
  • what connections the firm creates among various players in its ecosystem through the type of connection architecture it chooses and the subsequent economic value captured through a revenue model.

To become more attractive to customers, firms want to increase their customers’ willingness-to-pay. But there is a countervailing force: the cost of creating and fulfilling such a customer experience, which we refer to as fulfillment costs. It is important to distinguish between willingness-to-pay and actual price customer pays. If we create a chart, that has a willingness-to-pay on one axis and costs on other, we can create line, that connects winners who creates efficiency frontier – line that in certain points have highest willingness to lowest cost ratio. If a firm is able to widen gap between willingness-to-pay of its customer and fulfillment cost it incurs, that can create big competitive advantage for it (think in terms of Pareto dominance). The promise of connected strategy is that management does not have to limit its attention to making choices from among technologies that define the current efficiency frontier.

In order to create a sustainable competitive advantage, you need to create on top of connected experience also connected relationship. To do that you have to be careful about trust and privacy issues. Trust and privacy are central to creating long-lasting relationship. When firms don’t get the trust equation right, connected strategies can backfire. There are three potential risks in private data handling:

  • Cost of reducing personal (emotional) safety – some data like financial situation, medical information and sexual preference we don’t want to publicly share.
  • Sometimes data can be used to create monetary lost to customers.
  • Personal information might also be exploited by criminals.

In retail sector companies like Blue Apron with its meal-kit models, Instacart with same-day delivery, BigBasket with its ordering app, Tesco with its Homeplus app that allows ordering through QR code scan from posters on the wall of subway, Alibaba with its Hema supermarkets and delivery of prepared meals, based on customer purchase of fresh food, Amazon and JD with its no checkout lines stores, are moving efficiency frontier.

As mentioned, innovations in the grocery retail sector, that includes meal-kit delivery services, augmented reality displays and stores without checkout lines, are increasing both customer satisfaction and efficiencies. Matching supply with demand in a dynamic world requires new forms of connectivity that extend well beyond a person jumping into the street to flag a cab or calling a grumpy dispatcher to send a taxi. Once that connectivity is put in place, resources can be used much more efficiently.

Mobility is another sector where connected strategies are changing landscape. Companies like Uber, Lyft, Didi, Careem, Ola, Grab, Yandex have changed how people think about getting around. Ride hailing has shifted the efficiency frontier in the mobility industry. They offer more convenient ordering and payment. Enabling customers to order a cab via the app turns every block in town into a virtual taxi stand. The success of ride-hailing companies is not a result of being a better and more connected cab company. Their success is mostly driven by their ability to connect previously unconnected parties. These companies are also much better at utilization of their resources, using dynamic pricing based on demand and flexible supply of drivers, when they realize that demand is high and pricing is increasing. They are also creating another trust mechanism instead of expensive certification that traditional taxi services are using. Driver and customer estimations offer that. Trust is crowdsourced. In both grocery retailing and ride hailing we saw that costs are driven by many activities, some of which might not be adding value to customer experience.

But even these new models, can be additionally challenged. This is done with companies trying to create new connections. What is BlaBlaCar to Uber, Couchsurfing is to Airbnb.

Connected strategies are so disruptive because they allow innovative firms to push out the efficiency frontier. When you think about customer think outside your industry, because disruption usually happens from player from outside. You should look for competitor who are fulfilling ultimate need of your customers.

When you are estimating your own company potential in connected environment, think about how to use information you receive from customer to improve their willingness-to-pay and to lower your fulfillment costs. Imagine a world in which you know a customer need even before the customer knows this need herself. The willingness-to-pay for a product or service is a result of three factors: how much customer likes your product; how easy it is for him to obtain it and how expensive it is to own it. Consumption utility, accessibility and cost of ownership. Consumption utility attributes can be categorized into: performance attributes and fit attributes. Accessibility can be categorized into location and timing. In cost of ownership we derive value from a product that last longer and thus is cheaper on a per-usage basis, we can categorize value in usage cost over product life and maintenance costs over product life.

Connected customer relationship is a relationship between a customer and a firm in which episodic interactions are replaced by frequent, low-friction, and customized interactions enabled by rich data exchange. Process that a customer goes through of recognizing a need, requesting a solution to this need, experiencing how the fir respond to the request and then repeat everything will explain how such individual experience will transform over time to create a lasting customer relationship. If we focus on first three phases first, you as a manager need to ask yourself how you are going to recognize customer needs, you need to configure activities that will help customers identify and request the option that will satisfy this need and you need to put in place a system that allows you to respond with this desired option in a cost-effective way.

Idea behind respond-to-desire connected customer experience is that firm try to provide the customer with the desired product or service in the fastest, most convenient way possible. In order to make this experience good customer should expend as less amount of effort as possible.

In the curated offering connected experience, the firm becomes active in the customer journey earlier than in the respond-to-desire experience. Curated offering thus customizes the firm response with a specific set of options. Firm takes more active role in the search and selection process.

In coach behavior firm takes on a parental role and coaches the customer to change behavior. In the customer journey, it acts one stage before curated offering kicks in. It activates customers’ awareness of their own impending needs. Some of the tools this firms use in order to achieve coaching goals is creation of peer-to-peer network and its usage for peer pressure. Gamification is also one tool. Collecting badges, point, engaging in friendly competitions.

Automatic execution connected customer experience is about firm to obtain authorization to take care of something, the firm then automatically gathers information and fulfills the need, often before the customer had realized that the need has arisen. With the increasing connectivity of objects through the Internet of Things, more and more of these relationships based on continuous information flows will become possible.

A central aspect in creating new connected customer experiences is to design the information flow between the customer and your firm. Information includes everything that the firm may be able to use to deduce and fulfill the needs of the customer. Think about five dimensions to describe information flow:

  • The trigger of the information flow
  • The frequency of the information flow (episodic versus continuous)
  • The richness of bandwidth of the information flow (low versus high)
  • The customer effort associated with this information flow (low versus high)
  • The information processing that is required

When we look for information improvements when comparing different connected customer experience, we see that for curated offering we would need strong recommendation engine. For coach behavior, constant information flow from customer to firm is needed. So, firm need to find cheap and reliable technology for two-way communication. And automation execution demand ability to correctly infer the right product or service based on the automatically transmitted information.

Using AI in connected strategy, firms that are implementing this strategy, have access to lot of data because of repeat dimension, so they are better positioned then non-connected competitors.

Understanding which connected customer experience is best suited for your customer is vitally important. Transparency and the ability of customer to opt in or opt out is key in this respect. Customers who like to be in the driver’s seat. Having full control like respond-to-desire. Customers who like to make the final decision but still value advice benefit from curated offering. Customers who do not mind sharing personal data if they see a clear payback in terms of being able to achieve personal goals are willing to engage in a coach behavior customer experience. Customers who are comfortable with having a continuous data stream from themselves to a firm and who trust that the firm uses the data to fulfill their needs at a reasonable cost will be the most open to an automatic execution customer experience.

Repeated dimension strengthens the other three design dimensions that are involved in creating a connected customer relationship: recognize, request and respond. There are four levels:

  • Create unified customer experience across episodes.
  • Improve customization based on past interactions.
  • Learn at the population level to enhance product offerings.
  • Become a trusted partner to the customer.

Education is one field where this dimension was really used. Companies like Khan Academy and Lynda.com, that was acquired by LinkedIn are good examples. Standardized curriculum wastes an enormous opportunity for customization. Students have varying motivation, prior knowledge and maybe talent. Video pause button is probably the best used learning tool. It allows students to reflect and replay. From Khan Adacemy to smartbooks of McGraw-Hill and from Roseta Stone to Lynda.com, convenience is a key need and expectation of many users that we as educators might not welcome but must embrace. A connected strategy approach focuses on the learner, not the course.

The problem of orchestrating all interactions and weaving them together into a unified customer is harder than it first appears. The reason lies in the fact  that many companies now interact with each customer through multiple channels. This represent two problems, first is technological – complex businesses with multiple product lines often do not use a single database or IT infrastructure. Second is organizational one, historical organization with lot of separate business units. To move from a product-line-(channel)-based view of the world to one that put customer in the center of all transactions requires strong vision and leadership support from above. While the first level of customization is all about keeping track of and getting to know the customer across individual transactions with the firm, the second level is about turning this information into actionable knowledge. It is also about convenience. Convenience of access has become an ever more important element of customization. Level three customization is fundamentally about strengthening your ability to respond. To have the right product and service. Population-level learning allows firm to refine their product portfolio in two ways: one is to better chose which product to sell, the other one is to create their own product based on information collected from customer. One examples of last one is company Zalando.

As firms learn more about their customers, they have an opportunity to move from addressing one or more narrow needs to focusing on more fundamental ones. One approach how to do that is using why-how ladder. On bottom ladder is how need could be fulfilled, on top is why it would be good to fulfill this customer need. This approach aligns the search for solution with what the customer really cares about and this understanding opens up alternative solution approaches.

Better understanding of customer needs, a better ability to translate those needs into specific product requests, and a better assortment of products that fulfill those needs precisely all increase the willingness-to-pay of customers. At the same time, a better understanding of demand allows the firm to avoid inefficiencies.

Repeated dimension offer learning mechanism for companies to improve their customer handling. They have two levels, on individual level and on the level of population. They allow firms to enhance the personalization of their offering. As a firm gains more customers, three better-known positive feedback loops can also arise that will further strengthen a firm’s competitive advantage. First company will enjoy economies of scale, then network effects can arise and third is two-sided network effect.

Because a rich information flow from the customer to the firm is central to a successful connected strategy, data privacy, data security and transparent data use are absolutely essential. To build a connected strategy, you will have to have policies that address these guidelines, including the following:

  • Collection consent
  • Data quality
  • Purpose
  • Nondisclosure
  • Safety and breach notification
  • Openness
  • Access
  • Data portability
  • Data erasure
  • Accountability

Connected customer relationship get deeper and deeper over time by moving through four levels of customization:

  • Level 1 is about creating a unified customer experience by weaving together previously unrelated episodes.
  • Level 2 uses the data from past interactions to improve customization.
  • Level 3 is about developing the capability of delivering on those drivers when and where desired by the customers.
  • Level 4 corresponds to a move of the firm to tackle more fundamental needs.

Main question company can ask in order to start with customer focus activities is: how can it help their customers to create competitive advantage in their markets?

All connection architectures start with information flowing from customers to firms. Connection architectures differ in how the firm connects back to the customer.

In the most straightforward connection architecture, it is the firm itself that produces the product or service that fulfills the customer demand. We call this type of business a connected producer. Companies like BMW and Daimler that merge their car-sharing platform in 2018 or Salesforce and IBM are examples of connected producers. 

Next type of connected architecture are connected retailers. Firms whose main role is to showcase, curate and deliver products from suppliers to customers. Connected retailers receive information from customers and then create a connection between suppliers and customers. This connection runs through the connected retailer, as the firm is actively involved in moving the product from the supplier to the customer. Many connected retailer create customer value through a curated offering customer experience. While the internet has given customers access to practically every product and service available worldwide, such choice is overwhelming and requires a lot of customer time to make good decisions. Therefore, curation can create a lot of value. Sometime connected retailers move into connected producer field too (Netflix, Amazon, Zalando).

Connected market makers are companies that create a direct link between supplier firms and customers but that aren’t involved in handling the product or service. Connected market makers control the connection from the customer to the supplier, but they do not own what flows back from supplier to customers. Connected market makers thus rely on existing suppliers to fulfill the needs of customer. They are less capital expensive. Market makers can fulfill two functions: they can provide curated offerings and do so on a bigger scale and they can ensure that the product and services on their platform are top quality and provided by reputable sellers. With low entry cost, you have a lot of potential for start-ups but also a lot of competition. With some companies paying for leads in new marketing models, customer acquisition costs have become the new rent.

Crowd orchestrator are companies creating connections among previously unconnected individuals. The connections are made between individuals and customers, not between existing firms and customers. Crowd orchestrator creates new supply by allowing individuals who otherwise would not have participated as suppliers to enter the marketplace.

Peer-to-peer network creators. We can talk about three types of P2P network creators based on how they monetize their connection architecture:

  • Transaction or membership revenues
  • Fees for access to the information that is created in the network
  • Revenues from complementary products

Connected strategy matrix is a matrix that has customer experience on x axis and the connection architectures on the other axis.

Firm can create more than one customer experience and can operate with more than one connection architecture. There is no »one size fits all« for all connected strategies.

Revenue models in connected economy are mechanisms that are capturing some value for companies that their products and services generate. You could offer customers one-time fee or some monthly subsription. You can introduce refferal fee for some other parties, that also benefit from value created with new business models. Or maybe savings percentage.

We can categorize pricing history in four stages. First is haggling. Second is posted prices. With internet we entered into third phase. Dynamic pricing. And fourth phase is now, when we can look over limitations of traditional pricing like: limited information, limited trust and transactional friction and we can introduce pricing based on long-term relationship. We can introduce pricing based on features not know until now: when the product was used, where it was used, who used it, what benefits were derived from using it and what problems occured while using it. New revenue models are using six guiding principles:

  • Think value creation first
  • Make pricing contingent on performance
  • Remember the ecosystem is broader than the supply chain
  • Get paid as value created
  • Reinvest some of the created value into the long-term relationship
  • Be cautious when replacing cash payments with data payments from users

Before we think about how to build a revenue model for any business, we should ask ourselves what actions maximize the value in the system. Aligned incentives of all actors in busines is key.

Pay-per-performance is one way how to address customer needs for performance.

Regarding ecosystem, that is much broader area then only supply chain. It includes all firms and other organizational and individual entities that have some interest in your product. In the world of personal fitness, many gims now get more revenue from insurance companies than directly from the users sweating on their treadmills.

Pay-as-you-go payment model or platform as a service are new models in IT industry. In pay-as-you-go models, we can also see a lot of companies using »freemium« models, where basic features are free and premium version are payable. At this model it is really important that companies find proper balance in what they are giving for free. Micropayments are growing quickly with videogames and in-app purchases.

Some companies have a model where users pay with their data for usage of company product or service. Some of key revenue streams come from advertisers. Another revenue stream is from refferal fees. It is not hard to imagine that rising societal concerns over privacy, coupled with technological solutions that provide customers with much more control over their own data, will create a higher burden of proof for the feasibility of revenue models that are solely based on paying with data. Several technology experts recently have proposed to replace the pay-with-data revenue model with a pay-for-data model.

To create sustainable advantage, it is important that at least some of the value that is created is reinvested, strengthening the repeat dimension of the connected strategy. Rather than taking the value and simply handing it back to the customer, as is done in traditional loyalty programs, the firm should seek to increase the level of customization it can provide.

Once we know what functions the technology should perform, we can think about the technical means to accomplish them. Users derive value from what device does, not from its underlying technology. If we decompose connected strategy into functions. Those functions are connected to relationship and delivery model. We can then subtask all those functions based on STAR (sensing, transmitting, analyzing and reacting). To delinerate the underlying technologies, their functioning and the business services they perform, it is helpful to think of technologies in the form of a stack consisting of hierarchical layers. Lowest being physical transmission. Next layer will be concerned with sending data pack. The top layer are applications.

A lot of technologies are already available and a lot of solutions are already there. Originality is often in the use of the technology, not the technology itself. With companies doing some of the subfunctions in a proper way. We can approach this in two ways. Top-down, we create a vision and decompose it into subfunctions and then look for technical solutions. Or bottom-up, we see technical solutions and see what we can do with them. As managers, in addition to monitoring how other companies perform specific subfunctions in our classification tree, our job is to monitor the environment and look for promising new technologies that have the potential to bubble up through the stack.  

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