The Limits of Production-Centric Thinking & The Opportunities and Challenges of Customer Centricity

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This post is the second part of my "Understanding Marketing" series. It deals with customer centricity. There are two schools of marketing--production centric thinking and customer centricity. While production centric thinking still serves well for many companies, customer centric thinking has become the favourable choice. I’ll present why in this post.

Book Recommendation

Customer Centricity: Focus on the Right Customers for Strategic Advantage by Peter Fader

From Product-Centric to Customer-Centric Management

The Product-Centric Approach

The goal of the firm is to maximize shareholder value.

Maximum profiles through volume and cost reductions.

Key performance indicators such as market share.

Growth through extending the product.

Product-oriented organizational structure.

The competitive advantage: product expertise.

Cracks in the Product-Centric Approach

Technology-enabled product development → commoditization

Technology-enabled information flow → smarter customers

Technology-enabled delivery → retail saturation

Problem with Production Centricity

1. Technological advances and the speed with which new technologies are created and copied.

2. Globalization and the geographic advantages that have been lost as a result.

3. Deregulation and the way it has shaken up traditionally stable industries.

4. The rising power of the consumer and their new-found ability to get what they want, whenever they want, from whomever they want.

5. Customers want “end-to-end solution,” which may require products/services from multiple vendors.

6. Information systems enable customer-level tracking.

Data-Driven Business Models

Example 1 -- Harrahs, the casino chain in US

They're having a hard time competing against other chains that just had deeper pockets, greater resources. It was hard for them to develop the products and services to compete on a head to head basis. So Harrah's instead turned to its data, and in particular, developed an amazing loyalty program. Now many companies develop loyalty programs, but few of them were able to draw the actionable insights that Harrah's was to truly understand at a granular level what each customer's doing. Not only which games they're playing, but what meals they're eating, what room preferences they have, what entertainment options they seek. And to understand, when that customer is likely to change his behavior, when he's likely to walk away from the table, and what kinds of things that Harrah's itself could do to change their behavior for the better. What kinds of messages and offers to provide, at the right time, and through the right channel, in order to create and extract more value from that customer. So Harrah's was just brilliant in drawing those insights and understanding, for instance, what someone's threshold was. If this customer goes down about say, $150, it's time to intervene. It's time to offer them a meal or some kind of other activity which is going to make them feel great.But equally importantly, is going to reset their mental account. And so when they sit back down again, their threshold is back towards zero. So Harrah's was very smart about understanding that kind of messaging

Example 2 -- Tesco, grocery retail chain in UK

They turned to the data, they developed the OLC programme. They really understood their customers in some very clever ways, they would understand which households were buying a lot of their meals and, and other products from TESCO. And which ones weren't and specifically which kinds of products were the light households not buying from TESCO. So, Tesco knew which kinds of coupons to send to which kinds of households, at which time, in order to get them to buy more. And this helped them not only grow the business with those customers, but also helped them to compete more effectively. So when Wal-mart bought a small chain and entered the UK.Tesco knew which customers were most vulnerable to switch to Walmart, and which products they'd likely buy from Walmart. So Tesco knew, again, which coupons to send to which households, at which time, in order to really hold on to those customers and bolster their business. So by understanding its customers. TESCO is able to do a great job defending itself against Wal-mart and, and staying at top of the grocery business in the UK.

Three Cheers for Direct Marketing

The individual customer is the unit of analysis.

Know who their customers are and what they buy.

Aim to determine marketing communication based on past purchases.

Constantly determine (and leverage) individual customer value.

What is Customer Centricity?

Customer centricity is a strategy that aligns a company’s development/delivery of its products/services around the current and future needs of a select set of customers in order to maximize their long-term financial value to the firm.

Customer centricity requires the company to be willing and able to change its organizational design, performance metrics, and employee/distributor incentive structures to focus on this long-run value creation/delivery process.

Living in a Customer-Centric World

The goal of the firm is to maximize shareholder value.

Celebrate customer heterogeneity: distinguish the profitable customers from the less profitable ones.

Focus on future profitability (customer lifetime value) rather than past profits.

Success arises through enhanced (and/or more efficient) customer acquisition, retention, and development.

Customer-centric organizational structure.

The competitive advantage -- “relationship experties” with respect to focal customers.

		Product-Centric Company	Customer-Centric Company
Strategy	Goal	Best product for customer	Best solution for customer
	Main offering	New products	Personalized packages of products, service, support, education, counseling
	Value creation route	Cutting-edge products, useful features, new applications	Customizing for best total solution
	Most important customer	Most advanced customer	Most profitable, loyal customer
	Priority-setting basis	Portfolio of products	Portfolio of customers--customer profitability
	Pricing	Price to market	Price for value, risk
Structure	Organizational concept	Product profit centers, product reviews, product teams	Customer segments, customer teams, customer P&Ls
Processes	Most important process	New product development	Customer relationship management and solutions development
Rewards	Measures	Number of new products Percentage of revenue from products less than two years old Market share	Customer share of most valuable customer Customer satisfaction Lifetime value of a customer Customer retention
People	Approach to personnel	Power to people who develop products Highest reward is working on next most challenging product Manage creative people through challenges with a deadline	Power to people with in-depth knowledge of customer’s business Highest rewards to relationship managers who save the customer’s business
	Mental process	Divergent thinking: How many possible uses of this product?	Convergent thinking: What combinations of products is best for this customer?
	Sales bias	On the side of the seller in a transaction	On the side of the buyer in a transaction
	Culture	New product culture: open to new ideas, experimentation	Relationship management culture: searching for more customer needs to satisfy

More Reflections on Customer Centricity

Customer centricity does NOT suggest that “non-focal” customers should be ignored or “fired;” to the contrary, it is important to have a healthy proportion of such customers to add a high degree of stability and robustness to the overall customer base. (Think of them like cash in an investment portfolio.)

Taking this idea further, there is a paradox of customer centricity: the more that a firm tightens its central focus on a selected group of customers, the more it needs its “non-focal” customers to stabilize the overall mix.

Questions on Customer Centricity

Who is the customer? Can your organization come up with a single, consensus answer to this question, or can you at least reconcile the roles/relationships of the different potential customers?

What are the major barriers to account for? Develop a comprehensive list, ranked by the importance/difficulty of each barrier.

What resources can you utilize to overcome these barriers?

Thoughts about what competitors are doing in this area?

Does it make sense for your organization to become customer centric? If so, what should be your immediate goals and medium-term expectations?