When it comes to buying cars, Peter Wilton knows way too much -- at least as far as the people at BMW are concerned. Before Wilton bought a BMW from a San Francisco dealer last November, he thoroughly researched his options, eventually managing to slash the manufacturer's profit margin by eight percentage points merely by exploiting his information-rich environment.
From BMW's point of view that ought to be pretty scary. Because Wilton, the academic director of International Business Programs at the University of California, can state with absolute authority: "When a customer has rich information, they have power. When they have power, they take away your profit margin."Wilton wasn't the only winner in this tale. He drove away with the car on Saturday afternoon, having paid a $1000 deposit and on a pledge to return with the rest of the finance in seven days. The dealer had offered him financing at 8.4 per cent. His bank was offering 7.9 per cent. Back home he logged into CarFinance.com, filled in a five-question form, and signed up for finance at 7.1 per cent. The loan was approved by e-mail at 8am Sunday, and by 10am Monday CarFinance had a blank cheque at his door. Wilton had his loan, and CarFinance had another loyal customer.
The service offered by CarFinance, Wilton told delegates at the CIO Informat conference in May, is pretty close to best imaginable service. And in a world where a customer's knowledge is power, it is only those companies that constantly strive to deliver best imaginable service that are likely to survive long into the next century. To do so will mean using information of your own to offset the new information-fuelled rise in the power of the customer. Fighting fire with fire, in other words.
"If they have information about you, you'd better get really good information about them," Wilton said.
Today, customers call all the shots. They decide whether to contact a business.
They decide whether to come to its Web page. Once they get there they decide whether they will identify themselves. They decide whether to tell that business anything about themselves. "Basically the customer is in the driver's seat. And that's an uncomfortable situation for many of us," he said.
Surveys show Internet-savvy customers are now considering twice the number of alternatives they once did before deciding to buy in any product category. That means they're likely to consider eight to 10 options for the same amount of effort they expended before. With so many incentives to switch loyalty, businesses must find new ways to persuade customers to stay. And they have to start by getting as much information as possible about customer preferences.
Forget about focusing your Internet effort on generating sales and profits, Wilton said. The people at Amazon.com couldn't give a fig for shareholder value, revenue or profits. The one thing they care about is establishing a long-term relationship with customers. "When you look at all the companies who are winning in this space, that's the objective and the strategic thinking framework that they've assigned to their Internet efforts," Wilton said.
But while creating loyalty means knowing a lot about your customers, achieving customer intimacy isn't easy. After all, if information is power, why should a customer want to concede that power? When surveys ask Internet users how willing they are to provide businesses with information, they invariably reply: "I'm not." And why aren't they? Security, trust and privacy all score a mention, but the prime reason is uncertainty. "They don't know what you're going to do with it," Wilton said. "That's what they tell us: 'I don't know what you're going to do with this information. You didn't tell me.'"When you ask a customer what would motivate you to give more information about yourself, the number one answer is: 'Tell me what you're going to do with the information. Tell me what's in it for me.'," Wilton said. "And simply promising you'll use the information to give them a good product at a good price just doesn't cut it."On the other hand, telling them you'll use the information to improve the fit between the business and their needs might. Wilton said customers clearly expected increased fit in return for their information. Many companies are responding by providing customised service on the Net, from Web sites that let you build compact disks to those that let you custom build clothing. But while those services please customers, on their own they're not sufficient.
"The real game is to learn how to give back to the customer some of that new knowledge that they are acquiring anyway," Wilton said. "The customer is getting smart, and they will continue to get smart with you or without you. So one response to this problem is to actually contribute to this rising customer sophistication and make them smarter -- to give back to the customer some new knowledge. What is knowledge? Knowledge is unique information your firm has that no other competitor has, so in other words the customer can only get this content from you. And it's got to be relevant to the customer. You can't bombard them with a mountain of information that might potentially be relevant."Technologies like FireFly Passport, Net Perceptions and WiseWire provide collaborative filtering technology and content agents to help business figure out personal preferences and hence the relevant piece of information to feed back to a customer. That is what underpins services like My Yahoo and Amazon.com when they provide customised recommendations for books and products.
It's exactly that provision which is basically driving the relationship management strategy of most Web-based businesses, Wilton said. The name of the game is to establish a dynamic learning relationship with the customer, so that you are learning from them even while they are learning from you.
Creating Franchise
"Our goal is to create what I call customer franchise," Wilton said. "Franchise customers are customers that belong to us -- they'll never think of going anywhere else, because they think we are doing something no one else can do."Most companies are pursuing customer satisfaction as though it was the Holy Grail, yet satisfied customers still switch loyalties. In fact, recent research from Harvard Business School suggests as many as 80 per cent of customers who switch from one supplier to another might have been satisfied before they left.
"Now in the IT world we like to think that we have lots of captive customers and they can't switch because they're a prisoner to our technology. That's very common in the IT world -- we get the customer installed on a system or technology and they can't switch because the changeover costs are too high.
That's not the kind of relationship we want to have with our customers. We call people in these kinds of relationships 'unhappy prisoners'. They cost an organisation a lot of money."According to Wilton, the only way to create effective relationships with customers is to add more value than any other competitor. And the one thing that defines value to customers is some improved business or personal outcome.
The minimum customers expect from any business is that it provides a quality product and quality service delivered at a good price. Do that and customers will tolerate you -- you have entered the zone of competitive tolerance. But while such customers will give you repeat business, they may not be happy, and they are likely to share their business between a number of providers.
Creating customer loyalty, by contrast, means pursuing something much more ambitious: attempting to become the best imaginable provider, Wilton said.
"What's the best imaginable bank? How many days would it be open each week? Seven. How many hours? Twenty-four. How long would you stand in line? Never.
How many times would it make a mistake? Never. How many times would it greet you by name no matter which location you go to? Always. How many locations would there be? How much would it charge you on loans? Zero.
"The customer has that expectation. It's not difficult to find that out, you just have to go and ask. Most companies are terrified of asking for that information. Why? Because it is so far away from what we're doing, it's frightening."But there's no doubt it can be worthwhile to overcome that fear. After all, if you can live up to the customer's best imaginable expectation, those expectations will rise. Now you have won an exclusive position in their zone of tolerance because they won't tolerate anyone else. "That's called customer loyalty," Wilton says.
Running Jump
Is the notion of getting customers to where they will tolerate no one else just a wild fantasy? No, says Wilton. In fact, it's the underlying game being played in the e-commerce space: doing things that are best imaginable, moving that zone.
"Don't make little improvements in what you used to do in the past, take a big jump in the value that you're delivering a customer. They call it a discontinuous change -- radically reinvent the business and take a big jump forward. And it works, because the first time you do that, the customer opens up. They start saying: 'Okay, this is interesting, I'm willing to share information with you now.' CarFinance keeps sending me e-mail asking me for information. I keep giving them answers. Why? Because they've moved that zone."It's the game Cisco Systems is playing by setting a target of a maximum network downtime of three minutes in a year. And it works, Wilton said, he knows people who use Cisco Systems networks who just wouldn't think of buying from anyone else.
Clearly, if you play that game, you can move your customer to the top of the loyalty ladder, where they are not only extremely committed but between three and five times more profitable, Wilton said. Which is why he suggested that the current fascination with the Internet is fuelled by corporate desire to learn how to compete with information, rather than with products and services.
Embrace this notion and the core strategic asset of your business will no longer be a technology, a network or a product, but your customer information file. The idea is to build the richest customer information file possible, by creating a culture inside your company where people understand the importance of gathering that information and sharing it. "I believe that the future of competition is going to be around this: who's got the best customer information file and who can do something with it," Wilton said.
It won't be easy, and it requires a big shift in the culture of the typical organisation. Management must become comfortable with uncertainty. Jeans manufacturer Levis has found its e-commerce strategy requires it fundamentally to reinvent the company every six months. "How many of you have the energy to reinvent the business every six months? Because that's the game that's being played," Wilton told delegates.
Customer Information File
The customer information file should contain many items of customer data, with each piece falling into one of three basic categories: the customer's identity, the factors that drive their decision-making, and their transactions data. The latter embraces the things they buy, as well as the cost to serve them and their profitability. Many companies have a good picture of who their customers are, but fewer understand why customers are making the decisions they do or what it would take to make them loyal -- in other words, their expectations.
There are also significant problems with the customer information file. For a start, how do you move beyond transactions and internal costs to understand the true value of customers? "Most companies have data on what the customer bought, what it cost to serve them, and who they are," Wilton said. "They look at a customer who's not buying very much, and they say: 'That customer must be a bad customer. That's a low-value customer. Let's not spend any money on that customer.'"What have you just done? You've just doomed that customer to be a low-value customer for life, because you're not going to spend any money on them. You've said it's too expensive to serve them. If you don't spend any money on a customer, they will stay a bad customer." Instead, according to Wilton, "you should ask yourself why the customer isn't buying more and consider ways to convince them to become more committed, more loyal and therefore more profitable. In other words, to consider the future profitability of that customer. That's something you'll never discover by focusing on what they've bought in the past or on internal cost data.
"If you want to track the commitment of that customer over time and determine their future profitability you should learn how they define value, including their minimum adequate expectations and their best imaginable expectations.
Then you should develop a framework or strategy for creating customer loyalty."You must also calculate customer lifetime value -- the future profit from a customer assuming they were loyal, Wilton said. One department store in North America discovered a single loyal customer has a value of around $US186,000.
Domino's Pizza calculates that a loyal customer has a lifetime value in the vicinity of $US5000.
"Most companies wouldn't have a clue what this number is, and without that number you're not in a good position to justify the investments in technology and systems to make customers loyal. This is the single most important performance number in a business," Wilton said.
"How do you value a company? You value a company looking at the future cash flows, and you bring that back to the present value. Where do the future cash flows come from? They come from customers. The value of the company is no more than the total customer lifetime values of the individual customers. Calculate the future profit for each customer, bring it back to today's money, add it up -- that's what your company is worth. That's the number one measure we have to focus on."Companies are now building systems on the Web to help them discover what drives their customer's decision-making. When a customer comes to the Web site the system will identify the customer, check their customer information file, detect the empty cells, then pop up one question -- and only one question -- designed to fill one empty cell. Come to the Web site today and it might ask you for your minimum adequate product expectations. Return tomorrow and it will ask you your minimum adequate expectations for service quality. The process continues until the system fully populates the file.
But you can't rely on the Web alone, according to Wilton. Customer intimacy is built using a toolbox of different methods, and it can't be centralised. "You have to use as many listening posts and decentralised systems as you can. You have to start getting this information and insight from a lot of different sources. There's a lot of offline sources: traditional market research, customer service, tech support, all these places have information about a customer, and it needs to be brought together.
"Pull it all together; pull it into a full-picture, customer-insight database; get some kind of analytic capability in there; get the insights into your operations cycle. The Internet, and e-commerce world, is not an adjunct to the business. It is at the centre of the radar screen. It is supposed to pull every part of your operation together to deliver a clever solution to the customer," Wilton said.
Above all, think strategically about ways to use that great data to help you better manage the relationship with the customer. Since data mining systems can't help predict future customer value, consider comparing customers, looking for opportunities to customise the product or service, or finding ways to more effectively use your company's capacity.
And never forget that the "best imaginable" zone is a continually moving target. Customers will benchmark their expectations against every new standard that you set. Unless you keep up, best imaginable will quickly become merely adequate and you'll drift out of the zone.
"In effect, once you move the zone once, you've got to keep moving it," Wilton said. "Once you find out what that customer's best imaginable expectations are today, you've got to go back and do it again. What distinguishes sustainable leaders from one-time wonders is that they are always moving that zone: the learning relationship they entered into [with the customer] where they're collecting that data never stops. They continually redefine what best imaginable is.
"They keep moving," Wilton says.
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