Customer Experience Value-Driver Framework 1 by G.K. Kalyanaram, Professor, NYIT President, GK Associates 1980 2 nd Avenue # 1B New York, NY E-mail: kalyan@alum.mit.edu Tel. #: (214)-675-9458 and Ragu Gurumurthy, Principal, Deloitte Consulting LLP 333 Ludlow Street Stamford, CT 06902 E-mail: rgurumurthy@deloitte.com Tel. #: (203)-788-4743 1 We thank many of our clients and academic colleagues for their input and help.
Customer Experience Value-Driver Framework There has been much research in innovation. Innovation is created in different ways (Sawhney 2006.) One of the traditional approaches to innovation has been product/service innovation (focusing on attributes and features.) Many firms, such as 3M, INTEL, and HP, have successfully adopted the path of product innovation, and maintained product and technological leadership. However, over the last several years, the attention of executives and researchers has increasingly shifted to customer care, experience and service. Customer experience and service has moved from a nice to have category to a strategic asset. Firms are now developing operating models to use customer experience as a true differentiator. This is consistent with both recent and long-standing research findings. In recent research, Sawhney (2006) describes twelve ways for a firm to innovate, and one of the celebrated approaches to innovation is customer care and experience. Urban (2005) argues for customer advocacy and trust-based marketing. Von Hippel (2002) has empirically shown that users are the most successful drivers of innovation. Treacy and Wiersema (1997), while discussing the modes to market leadership, identify customer care and experience as one of the distinct modes to achieve such leadership. This development of a new dimension of total and integrated customer care, experience, and service for value creation and delivery has been a true corner stone of several corporate turnaround stories. The total customer experience is integrative of all the processes, and it should not be piece-meal. Generally, research, practice and discussion on customer experience thus far have been limited by two aspects. One, the attention has been more on some narrower measure (e.g. brand loyalty, market share) of customer satisfaction than total customer care and experience. Two, the research and 1
practice have focused on individual activities/events (e.g. post-sales or product performance), rather on the total and integrated customer experience (Lehmann, 2004.) A classic and early example of such integrated approach to customer experience is IBM s global services business which turned around IBM in a dramatic manner. IBM s services team is focused on delivering superior service to its customers by being their trusted advisors and by solving the customers problems with a total solution including hardware, software and integration. Currently, IBM Global services business accounts for over 50% of total revenue, and it constitutes significant percent of overall growth for the company over the last 5 years. Kodak is another interesting example: its recent strategic shift from digital cameras to offer of services around digital photography is consistent with the new opportunities in the market place (Financial Times, 11/29/2006.) Given the emergence of customer experience as a differentiator, or in some cases, just as a table stake, marketing executives are increasingly wrestling with a structured way to study and incorporate this in their marketing-mix thinking. Based on practice-data, we present in this essay a framework to understand customer care and experience. We define various viable potential offerings beyond the core product as customer offer zones. We show that customer experience is best maximized through enhanced offerings in all the customer contact-points (in the valuechain) and in each customer offer zone. We also outline the opportunities and challenges in enhancing customer experience in the customer offer zones. We affirm that customer experience can be defined (with substantial explanatory power) as a function of customer offer zones (which are themselves a function of product/sector life cycle), and the mode of delivery of customer experience and service. 2
Finally, we propose a generalized customer experience value-driver framework which addresses some of the relevant managerial issues. The questions addressed in this essay are directly related to the new AMA definition of marketing as a set of processes for creating, communicating and delivering value to customers. Customer Experience: Value-Chain and Customer-Contact Points, and Eco-System and Customer Offer Zones Customer experience is a function of parameters that go beyond direct experience from the core product. First, we discuss enriching customer experience in all customercontact points. Second, we address the relationship between customer experience and customer offer zones. Value Chain, and Customer-Contact Points: Customer experience is impacted by all customer-contact/touch points from pre-sales process to post-sales service and support as shown in Figure 1. Figure 1 The value chain includes accessibility of information about the product/offer, interaction with stake-holders during purchase (either distributors or direct sales), performance delivery of the product relative to the expectation of customers, post-sales 3
support (including servicing the product under warranty, or offering maintenance on an on-going basis,) and other value added services (such as the creation of a network community as in the case of itunes after the purchase of ipod from Apple.) Customer experience needs to be managed and enhanced across the entire delivery value chain. While this is not completely new to marketing professionals and practitioners, the effort has generally been segmented instead of being integrated. Historically, executives have not seen every customer touch point through the prism of customer experience. Given this renewed definition of customer experience, it is important to make every customer touch point rich and meaningful. Customer experience can be maximized by offering the best information to customers, and developing an ability to understand the customer needs at each one of the touch points. The goal is to build a bond and trust with the customers through the entire value chain. For example, even when a product is self sustaining, it is important to offer accurate and easy-to-understand information through promotions or labels or any other communication medium. On the other extreme, when several intermediaries (e.g. wholesale distributors, retailers, or value added resellers) are involved during the sales process, it is important to ensure that they are well trained on products/offerings and have the ability to understand relevant customer needs. Value added Eco-System, and Customer Offer Zones: In addition to ensuring superior experience along the customer delivery value chain (see Figure 1), it is imperative to assess what services are provided to customers that go beyond pure product offering. Customer service and experience offerings should go beyond the pure products-related offering (e.g. basic installation/maintenance service) to and extended set 4
of offerings (e.g. post-purchase consultative facilitation, design of warranties.) This set of extended offerings will create a value added eco-system, which will provide consumers both tangible and intangible benefits that go beyond the mere adoption/consumption/usage of the product. The eco-system will enhance the total experience of the customer. We call these extended offerings of the eco-system as customer service offer zones (see figure 2 for an illustration of the offer zones. ) Figure 2: Customer Experience and Service: Customer Offer Zones As we move through offer zones (from the inner core of pure products to the creation of more extended value driven related offerings that can further enhance the use of the core products), the firm is presented with new and different opportunities and challenges to capture and maximize value using different business models. One should keep in mind the interactive effect of these customer experience and service zone offerings and core product. Understanding the interactive effect will enable optimal pricing and ability to capture value during a customer/product life cycle. For example, by pricing songs at itunes at 99 cents Apple has been able to generate more demand for ipods priced between $250 and $350. Another example is the cost of hardware vs. on- 5
going maintenance and software upgrades. Companies can price the core product at a lower margin to capture higher margin and revenue from incremental services. We now briefly discuss the opportunities and challenges in each offer zone of our illustrative framework in Figure 2. Warranties: Regular and extended warranties have shown to be important marketing instruments in order to: segment consumers, differentiate and isolate the firm from competitive pressures, and /or increase the profit margins (V. Padmanabhan, 1995.) The perceived value and ability to price warranties vary across different types of products. As markets get more competitive, several types of warranties are becoming table stakes. Hence, warranties are moving from being a pure profit function to a built-in cost of doing business. Maintenance & Installation: For products that require maintenance and installation, it is important for firms to ensure that those services are easily available either directly from the firm itself or through extended channels. For example, in the consumer electronics sector, the emergence of home digital systems has created a new opportunity for the sale of flat screen TVs, amplifiers, and speakers. However, in order to accelerate adoption of this product, ability to install the home theater system and train the consumers is important. Best Buy has now offered to fill this void by offering an installation service, and has thus become a key influencing retailer for customers and suppliers. By adding value to a customer offer zone, Best Buy has increased its ability to price in a manner so as to optimize margins across products and services. Value added services complementary to products: Firms have an opportunity to develop and offer additional services that enhance the core benefit proposition of the 6
original product or services. For example, Apple has been successful in increasing the adoption of ipods by creating a friendly eco-system and enhancing the value of the core product. As another example, the wireless industry operators customize end-user devices for different applications to enhance customer experience of their total offering. Today, device is an integral part of a customer s decision making process of selecting a wireless service, hence creating customized content increases the core value of the basic wireless offering. Creation of community and network: This goes beyond creating incremental value through complementary service. Here, the product or service plays an enabling role in the creation of community or network. Skype is a good example of this concept. The core offer of ability to communicate with others has been used as way to bring people together. Similarly, MySpace offers information to different clusters or segments of the population, but it also enables people to communicate with each other. Here too the core products information and communication service act as medium to create a community. In each of these cases, monetization models are different and definition of customer services is more encompassing (and it now includes creation of community and network.) In summary, there are many opportunities and challenges for a firm to create and deliver (maximal) value in each customer offer zone. Customer Experience: Industry Sector/Product Life Cycle, and Customer Offer Zones Customer experience, value, and service are important in all industry sectors, and across product life-cycle stages. However, the type of experience and value would differ depending on the sector/product life cycle, and the nature and delivery of that experience 7
and service. We will first briefly discuss the strategic implications in the mature phase, and then in the growth phase of product/sector life cycle. Mature Phase of Life Cycle and Customer Offer Zones: Several firms have shown the value of focusing on customer care and experience during the maturity phase in a product/sector life cycle. Such a strategy enables firms to think creatively beyond pure product rationalization and cost dimensions (business efficiency) to generate growth. The most oft quoted example that fits this description is IBM s turn around from the early 1990s. IBM has generated significant growth over the last 10+ years from the services business which accounts for over 50% of revenue today. IBM has truly created a new dimension of growth by leveraging customer service, and as well a having redefined how hardware and software with services can be bundled to create unique value. Another example of this trend is EMC which, as a firm, has transformed from a hardware-centric company to software based holistic-offering (including hardware and software) company. HP is yet another company that has regenerated growth in a relatively mature market by re-energizing their services business (including online classes on digital photography and entertainment.) We are likely to see emergence of a more customer services led strategy from other large hardware-centric companies like Sun. In the telecommunications equipment industry, Ericsson has created a very large services business that now offers clear incremental value-added services that go beyond the basic maintenance service. The services business has enabled the company to generate significant overall growth, and it has increased customer stickiness of its core hardware and software products as well. Thus, there is substantial collateral benefit of services. Additionally, there is an increase in core product-related revenues. Similarly, 8
telecommunications service providers in the US are increasingly focusing on customer experience and service. As shown in Figure 3, a survey completed by the Yankee group indicates that customers value quality of service significantly, and the customer experience influences their purchase decision. Figure 3: Importance of Customer Care for Customers Source: Yankee report (2004) Growth Phase of Life Cycle and Customer Offer Zones: When firms are in growth phase, the value of customer experience and service is likely to be viewed differently. Skype is a classic example of focus on customer service. The true driver of growth has been their ability to enhance customer experience by making relevant changes in their software strategy, and in addition offering wraparound customer service. In the case of Skype customer service is an embedded cost to increase adoption of its offering which, in-turn, improves the overall value of the company. Apple s ipod is another example of a company in growth stage which has focused on customer service and experience that go beyond standard user interface (for which Apple is well recognized) by providing complete information at points of purchase through well trained representatives at flag ship stores and/or in the call centers. This has 9
enhanced the overall experience, and increased adoption of the service. Thus, typically in growth oriented stages, quality of service is important to facilitate faster adoption. Customer Experience Value-Driver Framework Following our discussions, customer care, experience and service are defined as a function of the customer offer zones and mode of delivery of service. Based on our assessment and generalization from several cross-industry cases, we propose a value framework to enable executives and researchers to think about the key drivers of customer experience and service. This framework offers an approach to relate the customer offer zones (measured by linkage to products how closely are they related to products) and delivery of service. The x-axis defines the level of linkage of offerings (and customer offer zones ) to the core product. When such linkage is high, then the offerings are close to the core product i.e. not many significant additional offerings beyond the core product are made (smaller number of customer offer zones. ) However, when the linkage is relatively low, a number of additional offerings beyond the core product are made (smaller number of customer offer zones. ) If the firm is in the growth phase or in a growth sector, it is enough to be closer to the core in the customer offer zones framework. On the other hand, if the firm is operating in a mature sector, then it is imperative to focus on customer experience and care, making it necessary to move away from the core zone to value-added zones as shown in Figure 2. Thus, as we move from left to right on the x-axis, the linkage to core product (close to core zone in Figure 2) decreases. 10
Figure 4: Customer Service Value Framework The y-axis is defined as the mode of delivery of customer experience and service. Such service may be delivered on-site close to the customer, or more remotely. The mode of deliver of service is driven by the type of service that is relevant, given the objective function and cost of delivery of that service. There is reasonable correlation between how a service is delivered and the extent of stickiness with customers. For example, if a service is delivered on-site, either directly by the product manufacturer or a distributor, the extent of bonding with customers is likely to be very strong. However, significant customer stickiness can also be created by an increase in network effect, even if the service is delivered remotely. Examples of this include Google and Skype, where the service offered is remote but the value is created through a network effect and provision of relevant information in the right format. Another set of examples, as illustrated in Figure 4, is the offer of managed services by communications equipment suppliers like Ericsson and Siemens/Nokia and Lucent. They offer high value service to customers to manage and monitor a carrier s network remotely in addition to offering field service support. They also offer related services like financing or a build operate and transfer with traffic in order to reduce 11
capital exposure risk for carriers in emerging markets. Thus, type of service can be a very important determinant on how the service is offered. In sum, drivers of value along customer service dimension will vary depending on the sector/product life cycle phase, as well as the nature of the sector and offerings. The value framework is supported by rich data from successful practice in the real-world. This framework clearly redefines marketing as a set of processes for creating, communicating and delivering (and maximizing) value to customers as a function of customer offer zones (customer contact points) and mode of delivery. In this essay, we have argued with case-studies that total and integrated customer experience is an important approach to innovation. We have also presented that customer experience should be maximized in all customer contact points and customer offer zones. Further, we show how to relate customer experience to industry/product life cycle, as well as the mode of delivery of the experience and service. Finally, we suggest a customer experience value driver framework as a function of customer offer zones and the nature of delivery of service. This framework and approach is also applicable to public goods. Most public goods are generally in the mature phase of the life cycle. References (1) Financial Times (2006), Kodak Refocuses on Digital Age, November 29, 2006. (2) Lehmann, Donald (2004), Linking Marketing to Financial Performance and Firm Value, Journal of Marketing, Vol. 68 (October), 73-75. (3) Padmanabhan, V. (1995), Usage Heterogeneity and Extended Warranties, Journal of Economics and Management Strategy 4(1): 33-54. (4) Sawhney, Mohanbir (2006), The 12 Different Ways for Companies to Innovate, Sloan Management Review, Vol. 47, No. 3 (Spring), 75-81. (5) Treacy, Michael and Wiersema, Fred (1997), The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus, Dominate Your Market. Addison-Wesley. (6) Von Hippel, Eric and Thomke, Stefan (2002) Customers as Innovators: A New Way to Create Value Harvard Business Review, Vol. 80 No. 4 April pp 74-81. (7) Urban, Glen (2005), Customer Advocacy: A New Era in Marketing, Journal of Public Policy and Marketing, Vol. 24(1) (Spring), 155-159. (8) Yankee Group Report (2004) 12