Module 11Module 11

Creating Customer Value Creating Customer Value Through The InternetThrough The Internet

Orientations in the History Orientations in the History of American Businessof American Business

What’s Next? What’s Next?

From mass production, to segmentation, From mass production, to segmentation, to niche marketing, to customization, is to niche marketing, to customization, is there a next step? there a next step?

Multiple markets residing within individual Multiple markets residing within individual customers.customers.

Co-opting Customer Co-opting Customer CompetenceCompetence

C.K. Prahalad and Venkatram C.K. Prahalad and Venkatram RamaswamyRamaswamy

20002000

““Customers are part of the enhanced Customers are part of the enhanced network; they co-create and extract network; they co-create and extract business value. They are business value. They are collaborators, co-developers, and collaborators, co-developers, and competitors.”competitors.”

““The competence that customers The competence that customers bring is a function of the knowledge bring is a function of the knowledge and skills they possess, their and skills they possess, their willingness to learn and willingness to learn and experiment, and their ability to experiment, and their ability to engage in an active dialogue.”engage in an active dialogue.”

MicrosoftHad customers test a beta version of Windows

2000. Sought feedback on features and attributes. Ironed out bugs. Added value by customers: $500 million.

CiscoOn-line service that gives customers open access to its information, resources, and other customers. Customers end up solving problems encountered by other customers.

Examples of Companies Drawing Examples of Companies Drawing on Customer Competencieson Customer Competencies

Medical fieldPatients research causes and treatments of diseases.Patients and doctors engage in active dialogue.Patients and doctors collaborate to develop treatment plans.“…the more knowledgeable customers become, the more likely they are to shape their heath care regimen.”

Examples of Companies Drawing Examples of Companies Drawing on Customer Competencieson Customer Competencies

Identifying and defining the competencies of

one’s own company is a tremendous challenge.Trying to do the same with the competencies

of one’s top suppliers and then integrating

those competencies further complicates

matters.How does a company harness the

competencies of millions of customers?

Harnessing Customer CompetenceHarnessing Customer Competence

Dialogue with customers is a dialogue of

equals. Companies no longer have the monopoly on

information access. Engaging these customer in productive

dialogue requires richer and subtler forms of

exchange.

Encouraging Active DialogueEncouraging Active Dialogue

Concept of “brand communities” and “subcultures of

consumption” have existed for 10-15 years. The Internet has facilitated the formation of self-

selecting virtual communities. The “power” of such communities derives from the

speed with which they can be mobilized.Companies that can tap into (and facilitate the

dynamics of) these communities will have an

advantage.

Mobilizing Customer CommunitiesMobilizing Customer Communities

Customers do not simply buy a product, they

buy an experience or bundle of experiences. Customers increasingly want to shape the

experiences themselves. Personalization and customization are distinct.

Co-creating Personalized Co-creating Personalized ExperiencesExperiences

Managing Multiple Channels of Experiences

Managing Variety and Evolution

Shaping Customers’ Expectations

Managing the Personalized Managing the Personalized ExperienceExperience

More well-informed customers, are in a sense,

competitors. With much of the same information available

to them, customer have more power. More willing (and demanding) to negotiate

terms.

Final Point – Customers as Final Point – Customers as CompetitorsCompetitors

Beyond Online Search:Beyond Online Search:The Road to ProfitabilityThe Road to Profitability

Ming Zeng, Werner ReinartzMing Zeng, Werner Reinartz

WORLD INTERNET USAGE AND POPULATION STATISTICS

World RegionsPopulation

( 2007 Est.)

Population% of

World

Internet Usage,Latest Data

Penetration

Usage% of Worl

d

Usage Growth2000

-2007

Africa 933,448,292 14.2 % 33,334,800 3.6 % 3.0 % 638.4%

Asia 3,712,527,624 56.5 % 398,709,065 10.7 % 35.8 % 248.8%

Europe 809,624,686 12.3 % 314,792,225 38.9 % 28.3% 199.5 %

Middle East 193,452,727 2.9 % 19,424,700 10.0 % 1.7 % 491.4 %

North America 334,538,018 5.1 % 233,188,086 69.7 % 20.9% 115.7 %

Latin America 556,606,627 8.5 % 96,386,009 17.3 % 8.7 % 433.4 %

Oceania / Australia 34,468,443 0.5 % 18,439,541 53.5 % 1.7 % 142.0 %

WORLD TOTAL 6,574,666,417 100.0 % 1,114,274,426 16.9 % 100.0 % 208.7 %

Growth of E-CommerceGrowth of E-Commerce

65% of U.S. online users now use the 65% of U.S. online users now use the Internet to shop.Internet to shop.

2006 online retail sales = $95 billion2006 online retail sales = $95 billion

2010 online retail sales = $144 billion2010 online retail sales = $144 billion

2006: 27% of total retail sales influenced 2006: 27% of total retail sales influenced by the Internet.by the Internet.

2010: 50% of total retail sales influenced 2010: 50% of total retail sales influenced by the Internet.by the Internet.

Online Search vs. Online TransactionsOnline Search vs. Online Transactions

CategoryCategory Online Search (%)Online Search (%) Online Online Transactions (%)Transactions (%)

MortgagesMortgages 5656 1.51.5

InsuranceInsurance 4444 0.40.4

Real EstateReal Estate 4242 1.51.5

New CarsNew Cars 41.541.5 1.51.5

Used CarsUsed Cars 2525 N/AN/A

Luxury GoodsLuxury Goods 2020 0.50.5

GroceryGrocery 1919 0.180.18

BeautyBeauty N/AN/A 1.71.7

FurnitureFurniture N/AN/A 0.10.1

Home Imp.Home Imp. N/AN/A 0.10.1

Consumer Decision-Making ProcessConsumer Decision-Making Process

SearchSearch

The Internet has greatly enhanced the efficiency The Internet has greatly enhanced the efficiency and effectiveness of this stage of the consumer and effectiveness of this stage of the consumer decision-making process. decision-making process.

Advantage of Internet limited by the extent to Advantage of Internet limited by the extent to which information search is an important factor which information search is an important factor in consumer decision making. in consumer decision making.

SearchSearch

Perceived RiskPerceived Risk-Perceived purchase risk is the -Perceived purchase risk is the degree of loss in the event of a wrong choice.degree of loss in the event of a wrong choice.Frequency of purchaseFrequency of purchase-Search is also unlikely -Search is also unlikely with familiar, repeated purchase, when with familiar, repeated purchase, when customers make decisions based on their prior customers make decisions based on their prior experience.experience.Functional vs. Value ExpressiveFunctional vs. Value Expressive-Functional -Functional products are bought for their physical products are bought for their physical performance, whereas value-expressive are performance, whereas value-expressive are bought for social image or for sensory bought for social image or for sensory enjoyment.enjoyment.

EvaluateEvaluate

High Touch vs. Low Touch ProductsHigh Touch vs. Low Touch Products-High touch -High touch product has to be evaluated with multiple senses product has to be evaluated with multiple senses whereas low touch products usually only require whereas low touch products usually only require the senses of sight and sound.the senses of sight and sound.

High Info. Content vs. Low Info. ContentHigh Info. Content vs. Low Info. Content- This - This aspect describes the degree to which product aspect describes the degree to which product evaluation is based on physical vs. informational evaluation is based on physical vs. informational attributes.attributes.

EvaluateEvaluate

Demand on Consumer ExpertiseDemand on Consumer Expertise- Successfully - Successfully choosing among product alternatives requires choosing among product alternatives requires differing levels of consumer expertise.differing levels of consumer expertise.

ExpertiseExpertise-is the understanding of the attributes -is the understanding of the attributes in a product and knowledge about how various in a product and knowledge about how various alternatives stack up on these attributes.alternatives stack up on these attributes.

Internet is currently much less effective in Internet is currently much less effective in providing expertise than in providing information.providing expertise than in providing information.

TransactTransact

Transaction is the process of Transaction is the process of agreeingagreeing contractually on the purchase, contractually on the purchase, payingpaying for for it, and it, and receivingreceiving physical delivery. physical delivery.

All three transaction elements are All three transaction elements are necessary. necessary.

Internet excels at the contract agreement Internet excels at the contract agreement and payment but is limited on delivery.and payment but is limited on delivery.

TransactTransact

Central Driver - Does the consumer derive Central Driver - Does the consumer derive value from the transaction process itself?value from the transaction process itself?

B2C e-commerce business models have B2C e-commerce business models have paid little attention to this aspect.paid little attention to this aspect.

Purchase as a Process vs. Purchase as Purchase as a Process vs. Purchase as an End.an End.

Non-CompensatoryNon-Compensatory

Hypothesis – One stage in the consumer Hypothesis – One stage in the consumer decision making process cannot be decision making process cannot be effectively compensated for by another effectively compensated for by another stage in the sequence.stage in the sequence.

Is this true?Is this true?

Business ModelsBusiness Models

Navigator Model – Portals such Yahoo, Navigator Model – Portals such Yahoo, AutoByTel. AutoByTel. Product Originator – Sony, Dell, Land’s End, Product Originator – Sony, Dell, Land’s End, CiticorpCiticorpExpertise Provider- Consumer Reports, Bizrate, Expertise Provider- Consumer Reports, Bizrate, and Zagatand ZagatTransaction Facilitator – Paypal, Transaction Facilitator – Paypal, TrueSpectra,Western Union, Advisor Central, TrueSpectra,Western Union, Advisor Central, PaypalPaypalLogistic Operator – UPS, FedEx, 7-Eleven Logistic Operator – UPS, FedEx, 7-Eleven (Japan)(Japan)

ConclusionConclusion

Success depends on how well companies Success depends on how well companies can match their business model with the can match their business model with the real value added of the Internet to their real value added of the Internet to their customers.customers.

Previous hype of B2C commerce may have Previous hype of B2C commerce may have been due to the immense improvement in been due to the immense improvement in effectiveness of the information search, effectiveness of the information search, however such efficiency gains cannot drive however such efficiency gains cannot drive every product category online.every product category online.

Discussion questionsDiscussion questions

What assumption does the authors’ What assumption does the authors’ definition of e-commerce success rest on? definition of e-commerce success rest on?

Is this realistic? Is this realistic?

A Framework for Customer A Framework for Customer Relationship ManagementRelationship Management

Russell S. WinerRussell S. Winer

What is CRM? What is CRM?

The application of technology to learning The application of technology to learning more about each customer and being able more about each customer and being able to respond to them one-to-one. to respond to them one-to-one.

Treating each customer with empathy and Treating each customer with empathy and sensitivity. sensitivity.

An expensive way to learn what otherwise An expensive way to learn what otherwise might have been learned by talking to might have been learned by talking to customers for five minutes. customers for five minutes.

What is CRM? What is CRM?

The application of technology which The application of technology which combines online capabilities and off-line combines online capabilities and off-line personal interactions which allow a personal interactions which allow a company to establish, nurture, and sustain company to establish, nurture, and sustain long-term customer relationships (Winer). long-term customer relationships (Winer).

Getting to know each individual customer Getting to know each individual customer through detailed customer information that through detailed customer information that allows for better target marketing (Kotler). allows for better target marketing (Kotler).

CRM ModelCRM Model

Create a Database

Analysis

Customer Selection

Customer Targeting

Relationship Marketing

Privacy Issues

Metrics

Creating a DatabaseCreating a Database

TransactionsTransactions

Customer contactsCustomer contacts

Descriptive informationDescriptive information

Response to marketing stimuliResponse to marketing stimuli

Data should be overtimeData should be overtime

The more extensive the information on each The more extensive the information on each customer, the greater the likelihood of creating a customer, the greater the likelihood of creating a meaningful customer relationship. meaningful customer relationship.

Analyzing the DataAnalyzing the Data

Limitations of analyzing according to Limitations of analyzing according to customer segments.customer segments.

LCV: Lifetime customer valueLCV: Lifetime customer value

Market basket analysisMarket basket analysis

Clickstream analysisClickstream analysis

Selecting CustomersSelecting Customers

What criteria should be used? What criteria should be used? Highest purchase rates?Highest purchase rates? Greatest brand loyalty? Greatest brand loyalty? Most profitable? Most profitable? Specified level of ROI?Specified level of ROI?

Caution in deselecting – can lead Caution in deselecting – can lead to unhappy ex-customers and to unhappy ex-customers and negative WOM. negative WOM.

Target the CustomersTarget the Customers

Mass-media promotions: TV, Radio, or print Mass-media promotions: TV, Radio, or print advertising, poorly suited to CRM.advertising, poorly suited to CRM.

Direct marketing: telemarketing, direct mail Direct marketing: telemarketing, direct mail and and emailemail, direct sales., direct sales.

New mantra: “1-to-1” Marketing or using New mantra: “1-to-1” Marketing or using Internet to facilitate individual relationship.Internet to facilitate individual relationship.

Are these methods effective? What Are these methods effective? What developments need to occur for more developments need to occur for more effective CRM communications? effective CRM communications?

Relationship programsRelationship programs

Relationship develops based on the Relationship develops based on the program, not the medium of program, not the medium of communication. communication.

Overall goal of relationship program: Overall goal of relationship program: deliver higher level of customer deliver higher level of customer satisfaction. satisfaction.

Customer Relationship

Management: Satisfaction

Customer Service

Frequency/Loyalty

Programs

Customization

Rewards Programs

Community Building

MetricsMetrics

Shift from company-centric (profitability, market Shift from company-centric (profitability, market share) to customer-centric measures in the share) to customer-centric measures in the evaluating the success of products and services.evaluating the success of products and services.

Web-based and non-web based measures:Web-based and non-web based measures: Customer acquisition costCustomer acquisition cost Conversion ratesConversion rates Retention ratesRetention rates Same customer sales ratesSame customer sales rates Loyalty measuresLoyalty measures Customers shareCustomers share

Current Success of Current Success of CRM ProgramsCRM Programs

Less than 30% of CRM-adopting Less than 30% of CRM-adopting companies achieve expected returns. companies achieve expected returns. Causes of CRM program failure:Causes of CRM program failure: Organizational change (29%)Organizational change (29%) Company politics (22%)Company politics (22%) Lack of understanding of CRM (20%)Lack of understanding of CRM (20%) Poor planning (12%)Poor planning (12%) Lack of CRM skills (6%)Lack of CRM skills (6%) Budget problems, software problems, bad Budget problems, software problems, bad

advice, other (all less than 4% each). advice, other (all less than 4% each).

Strategic SuggestionsStrategic Suggestions

Do not invest until there is a culture of Do not invest until there is a culture of CRM; the company is customer-centric. CRM; the company is customer-centric.

Don’t target customers, empower Don’t target customers, empower customers.customers.

Rely on information Rely on information from from customers, not customers, not about about customers.customers.