Strategy

The strategic importance of customer experience

At a high level, there is only one strategic imperative for every organization; better understand and better serve your customers by continuously improving their experience. The whole “digital” thing has become a magnificent toolkit to enhance customer relationships and tell the whole world about it at the same time. From a value chain perspective, it has caused something more nefarious; increasing leverage to the owner of the customer relationship.

If you walk into any local retailer, you will surely notice the array of products on the shelves and the various brand strategies to try to get you to buy. The name of the game in the past has been getting distribution and building a brand. Moving forward, this is shifting towards ownership of the customer relationship.

Power is shifting

In every value chain, there is an entity that has more leverage. For large multinational brands, they are in a strong position to dictate terms to retailers and attain shelf space. A retailer cannot forego the revenue from a brand that customers are asking for. Despite not owning distribution, consumer packaged goods companies have been able to secure prime real estate with their retail partners. However, as the percentage of goods being bought online increases, this position is increasingly tenuous. When the transaction occurs online, there is an infinite amount of shelf space and thus no distribution advantage for a product company (CPG, manufacturer, etc.). In any product segment that has a large percentage of sales occurring online, the power is shifting to the owner of the customer relationship: the ecommerce retailer. Amazon is a great example of this dynamic and as this NY Times article demonstrates, they are not afraid to take advantage (i.e. generate more profits for themselves). By creating their own private label brand, Amazon is bypassing “traditional” brands. Sure, private brands are not a novelty. There are private label brands in pharmacies or retail stores but the order of magnitude of this change is significant. In a typical pharmacy, a private label brand will be positioned right alongside a well-known brand. The main advantage the retailer would employ is price or promotions to push their own brand. Sales of a well-known brand are surely cannibalized to a degree but never enough to engender real harm. It it is in the interest for the retailer to push out a strong brand since it attracts clients through the door.

When a player like Amazon decides to integrate vertically, it has a much stronger position because it can push its own product to the top of its digital real estate. It can even exclude well-known brands to benefit its own. All of this is due to the fact that ecommerce pure players own the customer relationship. Organizations that don’t have a direct connection to their customers will find it increasingly difficult to secure strong distribution online. Every consumer packaged goods company is mired with this strategic challenge.  

Does every brand need to build a direct connection with its customers? I don’t believe it the case but the challenge will remain; they are beholden to an increasingly shifting value chain and the risks that are accompanied with it.

Data is not the only answer

Every organization stuck with this strategic deficit will probably have a corporate slogan of becoming more “data driven” but what value does data really bring? For entirely digital products, data brings about virtuous feedback loops. More usage equates to more information on how users react and improvements are made. For certain products, this creates an unassailable advantage, think Google and Facebook. Tying usage and customer feedback back into the product is the de facto way to improve customer experience moving forward. For a product company that does not have a digital touch point to create that feedback loop, there needs to be a new starting point.

Customer experience is the key

As Jeff Bezos eloquently stated in a letter to shareholders, consumers are divinely discontent. Customer expectations are always increasing and the root for competitive advantage begins there. The most evident place to start is better understanding customers. Often this means centralizing customer profiles across the organization. Measuring a campaign’s impact on sales is another. A strong business intelligence function is needed to correlate a campaign’s effectiveness on sales across regions. With more data being accumulated, this will induce a change from an organizational perspective. Marketing itself will move away from merely being a cost center and will become its own P&L. New upstart product companies are not following the old fashioned zero based budgeting approach. They are investing their marketing capital as long as it hits their revenue & market share objectives. There isn’t this silly of a fixed spend determined at the onset of the year.

 

Ruthlessly focusing on the customer experience sounds like a great slogan from the corporate slogan generator. It also happens to be the singular focus of every successful organization in an age where true power has shifted to the customer.