7, April 2017
Two terms that we often hear nowadays are ‘Digital Transformation’ and ‘Customer Experience’ (CX). For this article, I will focus on CX and briefly touch on how Digital Transformation is driving CX – I will not focus on what CX is or how we can provide a delightful customer experience for consumers (maybe that will be a topic for another article – but on another day). I will instead elaborate on where CX is headed and the strategic objectives your CX initiatives should be aligned to.
Like all natural phenomenon is explained by the laws of science, similarly, everything around business and money is related to economics and principles of economics. So, we start there – Let’s take a closer look at customers – let’s say that our hypothetical business sells coffee and we have a retail outlet selling coffee. For the customer walking in asking for coffee, the first thing we would like to know is what he wants and how much is he willing to pay – our objective is to sell coffee at the highest price that makes him happy. Let’s ponder on that for a minute and mull over the implications of this statement – so we need to know the perfect blend of coffee that he would be happiest with – strong coffee with a hint of flavour, some cream may be – we would have to make it exactly how he wants it – almost like reading his mind to decide what he wants and serve him exactly that. He should be delighted with what he holds and tastes in his hand and then he should be happy to reach out to his pocket (or flash his phone) and shell out money for it and leave happily. Now this means that every person walking into the store will get a different coffee, a coffee that possibly only he wants, he will pay for, and what leaves him happy. There will be no fixed menu displaying what we serve.
In microeconomics, the above is called Price Discrimination. First-degree price discrimination means a firm can identify a consumer’s willingness to pay and price him accordingly to maximize profits. Up until now, until the advent of big data and analytics, this was largely a theoretical concept as the ability to identify willingness to pay and quote a personalized price was difficult to implement. But firms are now beginning to implement sophisticated personalized pricing strategies. Joana covers this in her article Personalized Pricing: “Big Data is watching you!”. First-degree price discrimination considers that the cost of product sold stays the same and hence a higher price translates to profits. Emerging technologies will take this one step ahead as they will also allow the product to be personalized to the needs of a consumer and with technology aiding, largely at little to no marginal cost.
Well, discovering the needs of an individual. The guy who walked in wants espresso. How do they tell this consumer – Hey we know you like this kind of coffee and we are the best in town to serve it. Come, walk in and take a sip. And then, keep walking in! Historically, marketing was generic mass campaigns, but nowadays, marketing is more specialized and launch segmented targeting campaigns. Most consulting companies’ today talk about a “Customer Persona” – representing a segment of users with their needs, preferences, and characteristics. While it gives a good abstraction of the group, but it’s not necessary that everyone in the segment will have the exact same needs and wants – we are only simplifying a complex challenge by abstracting it to a group. Surely, it’s better than the mass that we would have otherwise, but it’s still far from optimized. In microeconomics, this is called Third-degree price discrimination. Next Best Offer or Next Best Action that are derived from segment level algorithms will continue to evolve. An 8 to 10% hit ratio on such offers is seen as a very good response.
Are customers willing to share their side of inputs to get more personalized services, offers, and content? Enter the connected customer of today. Devon from Salesforce talks about the connected consumer and how the willingness to share information to get better offers is changing – “consumers-want-more-personalized-marketing”.
For product teams, this level of personalization poses a challenge. From Henry Ford’s famous comment – “Any customer can have a car painted any color that he wants so long as it is black” to today, things have changed but still there is huge potential to improve. How can product managers make the product experience more personal and aligned to what the customer wants? In our hypothetical coffee shop, we won’t have a menu – we will serve what our customers want – a customer that walks in every day and orders the same thing, we will know what he wants; some would want to experiment and for new ones, we would have to discover what they may want – maybe enquire and suggest for a few days and then learn what he may be interested in. Sometimes the consumer won’t know either and we would have to help him discover. Having a fixed menu with some customizations simplifies the problem for us, but does not necessarily give the consumer the best experience. How many times have you seen a coffee shop attendant say – Sir you have tried the mocha past few times, we suggest a slight variation that you can try – and it’s on us, if you like it then you would order it next time, we hope.
Some things have a natural inclination to become dematerialized (in more common parlance, digitized); it started with music (Napster), movies (Netflix) then books (Amazon/Google) and now we are seeing it happen in cash and financial transactions (cashless is king). And we also have our digital avatars in the virtual world of Facebook, YouTube, Twitter, Instagram etc. Our searches on website leave a digital trail of what we are looking for and if you have noticed, in the last year, targeted digital marketing has become much more effective and real-time. Earlier if you searched for a flight, flight ads would start showing up much later and sometimes they would not at all; but it has changed in the past year or two. Rise in digital allows consumers’ behaviors and preferences to be revealed – and sometimes better than what a market survey would reveal because as they say, actions speak louder than words. Hence, digital starts hitting the potential to become more personalized.
We can see this effect more prominently in some industries – take Netflix as an example, it does a great job of pitching the movies or serials or documentaries that you may be interested in and the likelihood that you end up watching the movie is very high. Unlike say a bank, which has a variety of sources to look at – products you may have searched on the internet, your financial transactions, your credit scores and others. Insurance companies, for example, are looking at IoT-based solutions to find out about driving patterns, lifestyle habits etc. The difficulty to personalize is proportional to the depth and variety of data needed to discover you and your needs. Increasing digitization improves the possibility to personalize more.
Enterprises today simplify this problem by creating customer segments and customer personas and targeting efforts and actions to maximize returns by focusing on these groups. An 8 to 10% return from a segment focused approach has a great ROI, so the potential upside of a truly personalized capability can easily be guessed. However, the difficulty is, as segment sizes start to decrease, the number of segments increase and for the human mind to comprehend it becomes tougher and tougher.
Tools and technologies around big data, analytics, IoT, artificial intelligence will help us get to lower and lower segment sizes. This will not only pose a challenge to enterprises and technology companies but also regulators and lawmakers. How would you distinguish and justify when the AI engine recommends an X% interest rate for one and Y% interest rate for another and all happening in run-time and on data and information that is constantly being updated?
The race on CX is to get to a Segment Size of One (SS1) – where only the “single consumer” matters. Where is your enterprise on this race? Are your CX initiatives aligned to this direction? Are they helping you:
– Remove organizational silos and improve the ability to look at your customers holistically?
– Better discover what your customers (and prospects) might be looking for?
– Personalize the product and service experience for every customer?
– Drive towards a more personalized pricing mechanisms?