Learning to build loyal customer relations -- that last
The authors of The One to One Future cite numerous ideas for differentiating your business from the masses and leveraging demographic data into real value for your customers -- while using the Web as the ultimate tool to do so
Don Peppers and Martha Rogers's book, The One to One Future, is already a classic business and technology book for the 1990s. It purports to be a manifesto on restructuring your business to emphasize relationships with individual customers rather than masses or "average" customers. But it's really a primer on electronic commerce on the Web in disguise. (3,500 words)
The One to One Future: Building Relationships One Customer at a Time, by Don Peppers and Martha Rogers, Ph.D., is a book that was written in 1993, with a second edition in 1996 and a sequel out recently. I will review the sequel, Enterprise One to One, in a future column. For now, be prepared to enjoy a book that was written about two years ahead of its time. Even though the authors may not even realize it, The One to One Future is really a book about electronic commerce on the Web.
The primary thrust of this book is a business phenomenon that originated with the economic collapse of the late 1980s: the steam went out of the market for mass-produced goods. This was actually a decent time for a consumer to be living, provided that you still had a decent job. Consumer product businesses quickly found out that they could no longer get by selling the same undifferentiated merchandise at the same inflated prices with the same poor customer service.
Suddenly, the customer was really Always Right. Customers felt empowered. If they did not like what they were getting, they could (and did) mete out abuse to vendors, who would have to jump. Businesses that did not do so suffered. The software company that did not provide a toll-free number for technical support became a laughing stock. Good customer service cost money, though, which cut into profit margins just as surely as price competition did.
Mass customization -- What do you want to achieve?
To escape this downward spiral, management gurus of the late '80s through early '90s urged businesses to remember that mass production was mainly a phenomenon of the post-World War II era, and that before then, products were made individually, for individual customers. Bill Davidow and Michael Malone's seminal book, The Virtual Corporation, first laid out the principle that today's information technology makes it possible to achieve the best of both worlds: large-scale production and product individualization, without undue cost. Joseph Pine gave a name to this synergistic combination: Mass Customization.
Mass customization involves creating products that are individually tailored, yet doing so on a large scale. In the textbook publishing field, for example, the latest trend is customized textbooks that are composed from a professor's selection of curriculum modules for the coming semester. The classic example of mass customization in the digital information world is profile-driven news services, including personalized Web services like Time Warner's Pathfinder Personal Edition and PointCast.
Peppers and Rogers take the mass customization concept a step further. If you are a seller, what are you trying to achieve with a mass-customized product? You are trying to reach out to individual customers and give them what they say they personally want. That can be successful, provided that they do tell you what they want and that there is actual value in such individualization. The value of the personalized Web services mentioned above is that they give users ways of cutting through "info-glut" to give them, more or less, only the information they want to see.
But competitors can copy mass-customized products too, with now only marginally more effort than it takes to copy plain-vanilla products. This is especially true for information products. For example, early profile-driven news services like Desktop Data's NewsEdge, Individual, and Hoover found themselves in trouble when Pointcast figured out how to do the same thing over the Web and through advertising revenue instead of by charging customers.
It's the relationship, stupid
Instead, Peppers and Rogers look at the idea of developing long-term relationships with customers, the intent being to maximize the total business a customer gives you over a lifetime. Customized product design is just one dimension of such a relationship. The key to successful relationships is getting your customers to tell you, over time, about what they want, and when and how they want it. Such knowledge, they claim, is hard for competitors to reproduce, because it takes so much time to acquire.
This book overflows with ideas on how this relationship-building concept can apply to various types of businesses. These are not management consultants' highfalutin pronouncements about corporate strategies for Global 500 companies. Instead, they are highly pragmatic ideas that small- to medium-sized business can implement today (for the most part) with relatively little investment in technology -- although, as we will see, technology is at the heart of most of these ideas.
The ideas in this book apply to niche businesses who are seeking to differentiate themselves from mass marketers, who will ultimately compete only on price. The local florist who can send you a reminder -- via postcard, fax, or e-mail -- shortly before your wedding anniversary. The supermarket that, like the small-town grocer in the good old days, remembers what you buy every week and delivers it. The leftist political magazine Utne Reader's Neighborhood Salon Association, a program in which the magazine's subscribers can meet each other in their local neighborhoods and discuss issues. And many, many, many other examples.
Along with all of these examples are discussions of how mature marketing organizations need to be restructured to make this kind of thing happen. The idea is to structure the organization around customers first, products second, rather than the usual current situation, in which product managers rule and customer service is off in the corner.
Demolishing the top-down discipline
In general, Peppers and Rogers call for a complete revamping of marketing principles so that they focus on customers rather than products. They mercilessly demolish the foundations of mass marketing, which can be thought of as a "top-down" discipline. It started with products that appeal to as wide a range of people as possible (Henry Ford's Model T, Corn Flakes, vanilla ice cream). Then, as marketing organizations began to collect demographic information, the product pie was divided, and products were designed that fit particular demographics (Cadillacs vs. Chevys vs. Buicks).
As market researchers improved their ability to narrow down demographic data further and further, more and more variegated products appeared, supposedly appealing to more and more narrowly-defined groups of people (Miller Brewing Co., for example, offers Miller High Life, Miller Lite, Miller Genuine Draft, and Miller Ice, while there are zillions of pantyhose types available in your local department store's lingerie department to meet every lady's desire). But instead of increasing business, such nonsense has only left customers alienated and confused, resulting in what marketers euphemistically call "brand erosion."
The problem, according to Peppers and Rogers, is that no matter how far you zoom in on demographic data, you are still trying to define an "average customer," but there is no such thing. For example, just because a particular zip code has an average household income, age group, percentage homeowners, etc., doesn't mean that any actual customers fit these attributes. This is the proverbial "family with 2.3 kids and 1.5 cars." In Manhattan, where I live, some zip codes contain wealthy people in luxury buildings as well as poor people in housing projects -- but few of the middle-income people that the zip code's average would suggest.
The solution to this problem is that rather than continuing the top-down strategy and trying to define smaller and smaller demographic groups, businesses should instead be working "bottom-up" by compiling data from actual transactions with real customers. Working bottom-up in this manner requires that you fold, spindle, and mutilate a lot of data, but nowadays, small businesses can handle all the data they need on a PC with a spreadsheet or database program.
Supermarkets are excellent sources of transactional information, so it's not surprising that some of them already collect and use it, through bar-code scanners at checkout and "clubs" for regular shoppers to join. The scanners collect the raw data from purchases; the shopper's club card contains an ID number that tells the central computer whose purchases they are.
A club member who buys several dozen items during each weekly shopping excursion can feed the supermarket chain thousands of data points per year. This is enough data to draw meaningful conclusions about the customer's buying habits, which can do several things to enhance the market's relationship with that particular customer. First, the store can offer the customer special coupons for items he buys regularly, to keep him coming back. Second, software with an inference engine can examine past purchases, identify products that the customer doesn't buy but might like, and offer coupons for those -- inducing him to spend more next time. Third, the store can infer the customer's "usual order," fax or e-mail it to him, allow him to make the few inevitable changes each week, and have the resulting order delivered free.
Chasing the road warrior: A model in customer information accrual?
Perhaps the most classic example of marketing tactics designed to keep customers over the long haul -- forgive the pun-in-advance -- is one that's near and dear to me: airline frequent-flyer programs. The One to One Future examines these in intriguing detail.
Major domestic airlines are so interchangeable in their (generally lousy) levels of service that, even in this age of deregulation, they have been desperate to find ways of making their customers loyal -- hence the frequent flyer programs. People like me, who travel upwards of 50,000 miles per year on business, are the bull's-eyes of airlines' targets. As a result, we enjoy special treatment from our airlines of choice. And for my most usual route -- between New York and San Francisco -- I do have a choice, of two different airlines that provide frequent service on that route.
People like me are actually pretty pathetic -- we are like sheep in hands of the airlines. On the one hand, we get all worked up about the most minute differences between them, like how far it is to walk from the arrival gate in SFO to the rental car shuttle bus (American wins on this one) or how far in advance an elite-level frequent flyer gets to call to reserve upgrades to business class (United wins). On the other hand, we all know darn well that none of these factors is going to make us change airlines. This book cites a study showing that frequent flyer programs have dramatically increased "delay tolerance" -- how late a flight must be, on average, before customers walk across the terminal to a competitive carrier on the same route -- from 20 minutes to over three hours. Yes, we're talking sheep.
As the authors point out, frequent flyer membership helps the airlines as much as it helps us. In exchange for a free flight every once in a while, airlines get consistent revenue from us, as well as information on usage patterns that helps them with route-capacity planning. We get cheap upgrades to business class (albeit getting more expensive every year), while the airlines get incremental revenue from those upgrades that they wouldn't normally get (it costs $150 for the JFK-SFO upgrade, yet the better food in business class costs the airline a tiny fraction of that).
However, for all the attention Peppers and Rogers pay to frequent flyer programs -- and even though they don't claim that they are particularly good examples of one-to-one relationship building strategies -- frequent flyer programs unfortunately show some of the flaws in this book's thinking. Because airlines' level of service is so undifferentiated, I would think nothing of switching airlines if I could transfer my entire frequent-flyer relationship from one airline to another. And that is exactly what I did when I joined Sun Microsystems last year. I was a 50k "Platinum" frequent flyer on American, yet United was Sun's volume-discounted carrier. I could continue to fly American, and endure a lecture from Sun's travel agent each time I traveled, or I could switch to United. So I wrote a letter to United, explaining my dilemma, enclosing a copy of my year-end statement from American showing 90,000 actual miles flown, and asking them to give me equivalent 50k "Premier Executive" status automatically -- which they did without hesitation. So now I fly United. Is it any better or worse than American? Nah.
Peppers and Rogers's basic argument is that a good long-term relationship with a customer is based on accruing information about that customer that:
Let's take a look at those assumptions. All three must hold, yet they don't in many situations. In the airline frequent flyer case, for example, the information that takes a long time to compile would be your actual flying behavior -- which routes, what frequency, what times of day, how much baggage you check. Yet this information doesn't help you in any direct way. At most, if you're one of many travelers with similar usage patterns, the airline might improve service on the given route by adding flights, using more convenient gates or flying newer, more comfortable aircraft. But those items pertain to groups of people, not individuals. Truly individual items, such as whether you prefer an aisle or window seat, or whether you require special meals, are trivial and easily obtained by filling out a simple form -- thus making them easy to transfer to the competitor. This is even more true if your travel agent stores your profile.
Finally, the "real value" in elite-level frequent flyer programs is in the form of mileage bonuses, upgrades, priority check-in, etc. But as my experience shows, the competitor was more than willing to pony these things up on the promise of future business -- which, as Peppers and Rogers point out, is the real name of the game anyway.
Assumption #3, that you can transform customer-supplied information into real value for him or her, is questionable in general. Will you, for instance, really find it "valuable" if the florist sends you a postcard two weeks before your wedding anniversary? Peppers and Rogers argue that the answer is yes in a surprising number of cases. One example they cite was of a company that makes home-use breathalyzers, which obtained a list of people with recent drunk-driving convictions and sent direct-mail advertisements to them ("Avoid this unfortunate embarrassment in the future!") -- and thousands of them bought.
Their point is that everyone may not appreciate the relationship you try to build with them, but some people will. Those are customers who will not merely jump to the next vendor who comes out with similar goods at a lower price. They are potentially loyal customers, who will give you steady business over their lifetimes. In other words, they are your best customers, and you should concentrate your efforts on keeping them.
How you keep them is, again, the focus of much of The One to One Future. Peppers and Rogers throw out a seemingly endless stream of clever, imaginative ideas. You may look askance at a few of them, but I imagine that they came up with the raw material for the book through a series of brainstorming sessions, and that's the spirit in which you should take the book -- remember that in a brainstorming session, ideas are generated, not evaluated. The zillions of ideas should stimulate your thinking about how you can apply their basic one-to-one principles to your business.
The Web is everything
They also talk quite a bit about technology you can use to implement many of the ideas. The technology they discuss is mostly low in cost, but otherwise it is all over the map, from touch-tone phone-response through the phone company to automatic fax services to special services on bank ATMs to the Web.
The book refers to the Web fairly often, but it looks unfortunately like a bunch of "Oh, yes, and you can do that on the Web, too" phrases were inserted in for the second edition. Yet most of the ideas for building customer relationships are ideal for implementation on the Web, and indeed, the Web makes some of the emerging technologies they discuss (e.g., automatic fax form scanning) utterly unnecessary. In fact, if you work on your company's Web site, this book is a treasure trove of ideas on how you can add value to your company in ways that your upper management might never suspect. Just read the examples and mentally substitute "Web site" for "fax service," "electronic bulletin board," or "bank teller machine."
The Web is the ultimate tool for creating the kind of one-to-one relationships touted in this book -- especially when augmented with electronic commerce technology that makes it easy to buy things online. One of the best real-life examples of this is Amazon.com -- just click on the URLs at the bottom of this article.
Amazon.com's automatic search services, called "Eyes" and "Editors", are exactly what Peppers and Rogers have in mind. I have a standing search query with Amazon's Eyes service. I like Sherlock Holmes stories, and there is an entire sub-sub-genre of new Holmes stories written by current authors in the style of Arthur Conan Doyle. So I have a query with Amazon.com of the form (Keyword="Sherlock" AND Keyword="Holmes" AND NOT Author="Doyle"). Every so often, Amazon executes my query against its entire "virtual inventory" of over a million books, and if there are any matches, they send me an e-mail message. If I want to investigate one of the matching books, I simply click on the URL in the e-mail message, and the actual Web page for that book appears. Another click, and I can order the book.
Do You Want Big Brother to Watch You?
Another important issue that comes up in Peppers and Rogers's model is your willingness to divulge enough information about yourself for a vendor to translate into value back to you. Their basic points are that it has to be done delicately (e.g., no annoying telemarketing; in their view, that's the only thing MCI did wrong in its infamous Friends and Family program), and once it's done, the privacy of the information must be sacrosanct.
You probably don't need to be told about the myriad entities who know everything about you, or how easy it is (for credit card companies, for example) to get such information. You may also know about commerce in mailing lists -- but until you read this book, you probably have no idea of the size or ubiquity of that industry. It's frightening.
To their credit, Peppers and Rogers take a strong stance in favor of privacy and against giving such information to anyone who simply wants to sell it. They stress that the cornerstone of a one-to-one relationship is trust. And if you, for example, buy books on trout fishing from Amazon.com, and then get solicitations from fishing tackle stores or Field and Stream magazine, you are going to be pretty annoyed at Amazon.com. Yet at the same time, if you run a business in the one-to-one manner, collecting information about your customers, mailing-list brokers will find out, and they will offer you money for that information. Will you turn it down?
They also raise the very intriguing point that, whenever you buy something, you effectively give the seller unlimited rights to information about that transaction, which is worth something to the seller. Because you are an equal participant in that transaction, you should enjoy some of the value from information about it. But you don't, and that's unfair. They go on to discuss some economic models that have been proposed -- by technology guru Esther Dyson, among others -- in which buyers get compensation for such information, according to the nature of the info. It's easy to imagine a Web-based intermediary for such information: you fill out some information with www.PeopleData.com, who sells it to its subscriber companies, who in turn must offer you credit towards purchases -- or, through emerging technologies like Java Commerce, you get actual money stored in your electronic cash card.
This discussion on ethical issues of the marketing information industry is absolutely fascinating, as is the final chapter -- the almost-obligatory "vision of the future" chapter.
The One to One Future is, overall, a terrific book. Its only drawback is its length, which in my view is excessive, by about 50 pages. The authors repeat their basic message about the nature of value-producing one-to-one relationships far too often: after the fourth or fifth time, you get it, already. This lends more weight to my suspicion that Peppers and Rogers created this book as a result of several brainstorming sessions, which they connected together into a book, rather than as a logical progression of ideas developed from beginning to end.
Nevertheless, you will enjoy reading this book. It will tell you all about how to use the Web to help you achieve loyal customers for life.
If you have technical problems with this magazine, contact firstname.lastname@example.org