By Mary J. Cronin.
The Net makes relationships more complex, multidimensional and volatile at the same time that it offers unprecedented opportunity.
The Power of Exponential Relationships
As Internet-based companies and entrepreneurs spin more and more innovations off into the marketplace, it has become almost impossible to keep track of the emerging opportunities, never mind predict the potential winners. On the Net, the number of "new new things" expands exponentially as each new idea partners with each of the others and the life span of the losing technologies grows shorter and shorter. Online offerings can penetrate the marketplace more quickly than ever, but that does not necessarily mean they will translate into profitable business models or popular favorites. The fact remains that technology alone cannot ensure loyalty -- customers have to see some personal value in the innovation before they will embrace it. And predicting which innovations will take the market by storm has been fraught with more misses than hits.
By spawning eyeball-hungry competitors from unexpected quarters and pushing the pace of technology development, the Internet poses tough challenges to managers who are trying to figure out what their customers really want. At the same time, this global network offers a vast and constantly expanding market to companies that have developed an integrated digital value system. Advanced Web sites can simultaneously manage millions of casual visitors, recognize returning customers, provide different types of content and interactive pathways depending on individual preferences and past browsing histories, and do it all in a trusted, relationship-building mode by getting the individual to actively contribute to the process. Managing real-time relationships via the Internet provides opportunities to create customer buy-in and loyalty that most managers haven't fully grasped and few companies have built into their customer-facing strategies. The core elements that enable this transformation in online relationships are collectively defined in this chapter as the "ER effect," or the power of exponential relationships. The ER effect is part of a dynamic cycle that generates more and more trusted relationships within the digital value system framework, providing the impetus for new product developments and for designing service offerings that allow companies to keep ahead of the wave in the ever-changing Internet economy. Characteristics of the ER effect include a reversal of the traditional trade-off between reach (the number of customers you can be in direct contact with and pay close attention to at any given time) and responsiveness (the quality of the individual interaction that you can support with any given customer on demand) and the depth of relationship that you can sustain over time with all your customers. The power of exponential relationships means that the more participation and exchanges that take place within a value system, the more value there is available to each individual participant, including the following:
-- a shift from passive to interactive to real-time product experiences as customers take the initiative to personalize and share information with other users and with the company in a variety of integrated online and offline contexts; and
-- the ability to test ideas and products, get broad market feedback, and move more quickly in response to new technology and opportunities with a focus on serving customer communities by bringing them inside the digital value system.
This chapter analyzes how the ER effect transforms strategy for building customer relationships from a resource-constrained, company-driven process to a shared and unlimited exchange of increasing value in an open marketplace. The ER effect represents a fundamental shift in how managers need to think about generating and providing value for customers. Companies that don't have a comprehensive strategy for building and enhancing online real-time customer relationships will find themselves increasingly shut off from the prime source for vital information about customer needs and expanding markets.
The More, the Better
Like some digital Rumplestiltskin spinning straw into gold, strategically managed, trusted Web sites can turn enormous numbers of visitors and large rates of participation into high-quality individual relationships. Given the right tools, the more people who join a digital value system, the better the level of individualization that any one customer is likely to receive. The shared data grows richer and the total pool of resources keeps expanding as more people take advantage of a particular online service or Web site. This may sound irresistible in theory, but does it really work in practice? Consider an exponential relationship effect that took the online music world by storm -- a modest program for sharing MP3 digital music files called Napster. . . .
Napster combines a simple plan with the power of the Internet to connect people and resources in real time. Picture a user-friendly, point-and-click, free software package for acquiring your favorite music tracks, playing them through your computer's sound system, and storing them on your hard drive for future listening. Add an equally simple system for searching a vast online inventory of digital music by song title or artist and downloading it to your personal files whenever you want. Now connect the personal computers of all the people who are using this software to a cluster of Internet servers so that everyone can browse and help themselves to everyone else's music files. What you get is a system that can grow at an exponential rate with very little central support and increasing returns for all participants as the size of the user base skyrockets.
Napster represents a breakthrough in exponential relationship value rather than a technical tour de force. In fact, the technology behind Napster is simply an application of the well-known and well-worn file-sharing capabilities of the Internet that go back to ftp, Archie, Prospero, and gopher. The undergraduate who originally designed and released Napster was new to software development and used only a few basic programming tools found in any off-the-shelf program development package. The real power of Napster is its ability to handle millions of users interacting with each other in real time through the Internet's unified name space, multiple interconnected servers, and transparent, peer-to-peer relationships between all participants.
Instead of high-powered technical innovation, the essence of the Napster value proposition is share and share alike. Users get access to the music on other people's computers in exchange for opening up parallel access to their own files. Whenever they log onto the Napster service, they become providers as well as consumers of resources. And the more they participate, the more they have available to share with the rest of the community the next time around. Once users come to terms with the security and performance issues of the Napster system and buy into this covenant for mutual exchange of resources, they are poised to add value to everyone else in the system. The workings of the system and its shared value proposition are so obvious that the consumer buy-in process is usually straightforward and swift -- the steps from discovery of the resource and its covenant (the individual user "gets it") to security and performance evaluation (the user "wants it") to full resource sharing (the user "does it") can take place in rapid sequence.
Each member brings new resources to the system and helps to spread the load so that the system can accommodate more and more demand. As more users join the party, Napster becomes a growth and resource-aggregation juggernaut. Leaving legal and business questions aside for the moment, the growth of such a program is limited only by the size of the Internet itself. In its first nine months of its existence, word of mouth and online publicity fueled Napster's growth from a handful of college student users and a few hundred digital music tracks into a distributed resource encompassing millions of music files and more than 500,000 active users. By the time network administrators on college campuses took note of a massive spike in downloading activity and tried to shut off access to Napster for their students, regular users were devoted enough to circulate petitions and lead demonstrations to save their Napster access. Such spontaneous growth and loyal user communities underscore the disruptive power of new value relationships in an interconnected world.
Along the way, Napster, of course, incurred the wrath of many established players in the music industry. The recording industry filed suit claiming copyright infringement for the prerecorded music that users were exchanging on Napster. Legal battles may prevent Napster from turning itself into a profitable business, but they don't detract from its demonstration that "more is better" when it comes to relationships and resources on the Internet. The Napster concept applies to any type of digital resource, and other companies are already launching similar programs for software and video file sharing, using a server-to-server distribution model. It won't be long before new business models and the tide of online users who buy into them become major forces in the Internet economy.
Harnessing the ER Effect for Business
Other examples of exponential relationship power have already been harnessed by leading Internet enterprises for competitive advantage. The appeal of information pooling of stock picks and investment strategies has spawned dozens of companies that bring together analyst reports and community discussion groups focused on the stock market. The model adopted by Clearstation, now an E*TRADE subsidiary, combines the intrinsic appeal of discussing investment picks with a more structured system for leveraging the power of active and widespread participation. The Clearstation investment community makes it simple for every new member to establish a personal portfolio to track the performance of stocks and collect information about companies of interest, including the comments of all other members. These portfolios are a free and private service designed to help individuals track stocks easily and keep track of the value of their holdings while considering new investment moves. Taking the information-pooling model one step further, Clearstation also lets members share a public "recommended" list of investments with the rest of the community. These recommended lists carry with them a history of how the picks have performed over time, which in effect provides a ranking of the financial astuteness of the member who selected them. A link to the top-performing recommended lists is available on the Clearstation home page so the members can see who is making the best choices and perhaps elect to follow that lead.
This model allows Clearstation to compress the value of the best insights from among all of its members and to present it to the collective. The more people who participate, the more data about which stocks and which recommenders are most successful over time members can access and the more grist they have available to inform their own financial choices.
Taking a different approach to exponential relationship power, AOL's popular Instant Messaging system has helped to differentiate the network's own communication services and has been built into customer support systems and business-to-business applications. The origins of Instant Messaging, like those of Napster, demonstrate that facilitating simple connections among Internet users can have far-reaching benefits. The Instant Messaging story started in Israel, when two software engineers had an inspiration about putting real-time communication protocols that had been around since the dawn of the Internet to a new use. Their prototype product, called ICQ, featured an engaging Web browser interface that allowed anyone who downloaded the ICQ software to send a quick message to any friend who signed up for the ICQ network. The interesting feature of this message was that it could pop up instantly on the computer screen of the recipient if the addressee was already logged onto the Net. Rather than try to sell the software commercially, the designers decided to distribute it for free on the Net.
Two years later ICQ had more than 50 million users around the world and a corporate valuation of $50 million even though they were giving away the product for free. Those users weren't classic customers -- no one had asked them to pay for anything, and often no one except a friend had "marketed" the ICQ service to them. For the most part ICQ users identified with their own personal cluster of friends rather than with the network as a whole. But collectively, the expanding user base created a communication network that could speed traffic around the world and could add more and more new members who could then find more people they wanted to reach immediately. That, in turn, was enough to convince AOL to pay $280 million to acquire ICQ and build it into the Instant Messaging Service.
ICQ took the open standards of the Internet and used them to create a service that was tailor-made for Net users, made it easy enough to use so that people could help themselves to it, and took advantage of viral marketing by building in an incentive for every user to encourage their friends to join. The Internet was simultaneously the total market and the sole marketing tool. ICA combined the value of personalized messages with the instant gratification of real-time interaction with people and the option of paging them through the Web. Most important of all, it turned the familiar, sequential exchange of e-mail into a real-time, interactive experience that could grow at Internet speed.
The ER effect allows companies to build high-value relationships with individual business and consumer customers and at the same time to listen to the broader marketplace. By moving from superficial formulas for online personalization to high-value, trusted relationships with online customers, managers can use the Web to bridge the reach and responsiveness gap that limits relationship building in other media. Putting the ER effect to work allows companies to do the following:
-- let customers take the initiative in building the business-to-consumer relationship up to a level of trust and fulfillment that provides both the business and the customer with optimal value;
-- expand the digital value system to provide a scan of the broader marketplace for themselves and for their partners;
-- use real-time interaction to constantly test new offers across a range of relationships and market segments;
-- improve and adjust offers in real time to keep up with changes in demand; and
-- anticipate what is coming next in terms of potential customers for different types of services and products.
Through the ER effect, real-time interactions with all online customers expand a company's market reach to include the broader universe of potential customers who are connected to the Internet. Equally important, the ER effect represents a critical inversion of the bricks-and-mortar business assumptions about and experience of high value customer relationship management. Unlike the bricks-and-mortar world, where service and satisfaction tend to decrease as traffic and transaction volume increase, the Net-based commercial offerings can actually improve in quality as more people accept them and contribute resources to them. This heralds an end to the traditional trade-off between the number of customers that can be served and the depth and quality of the service provide -- another facet of "the more, the better" and the ER effect.
There have always been premier customer groups -- the cream of the cream, high-profit groups that companies would go out of their way to cultivate and to offer personalized services to. But it was a challenge simply to identify that group of regular big spenders and to track their behavior patterns and anticipate their needs. Even those companies that pride themselves on personalized services could not manage to keep close track of more than a few hundred thousand such customers, and most elite lists were much smaller.
. . . In the bricks-and-mortar world, discount store, supermarket, and standardized catalog offers reach the largest number of people in the most cost-effective way, with a differentiation based on low pricing or convenience rather than on individual attention. Premium products and services that differentiate themselves based on customization and high-quality relationships typically carry a higher price tag and are targeted to a smaller segment of the market.
This division between strategies that focus on discounting and mass-market purchase and those that differentiate through high cost and deep quality was reflected implicitly and explicitly in the early days of e-commerce in the types of products and Web business models that came to the market. Analysts argued that certain goods and services, including expensive jewelry, clothing, and services based on personal trust, such as medical and legal services, were intrinsically "high touch" and not likely candidates for online sales. Consumers would want to have the opportunity to feel and touch the product to be confident about making a purchase or would need a different level of relationship with the merchant to trust the advice offered.
But over the past five years, the Internet has demonstrated again and again that given enough information and trust, consumers will in fact make these and other types of high-relationship purchases online. What's more, as long as the numbers don't slow down response time, Web sites can make a virtue of attracting a crowd of visitors. Online markets such as eBay thrive because they attract a critical mass of buyers and sellers, which guarantees a brisk trade and a steady flow of new goods on offer. The value of any auction or brokerage site is enhanced by a large flow of visitors to ensure liquidity. Similarly, the aggregation of experts and practitioners on a targeted discussion or community site, such as the technology-oriented Usenet newsgroup of old, brings more value by expanding the resources available to respond to questions and by creating a sense of community. The huge customer base selecting books at Amazon or downloading music from MP3.com feeds a stream of valuable data to the database and software engines that constantly sort and match selections to customer profiles behind the scenes. This, in turn, contributes to the accuracy with which those sites can target recommended titles to match the taste of any individual visitor.
Eliminating the traditional trade-off between broad reach and in-depth customer relationships changes all the rules for marketing and customer services. Internet-based relationship management offers any size company the optimal combination of high reach and high responsiveness at a realistic cost/staffing ratio. Instead of dividing attention between current high-value customers and potential new markets, companies with a fully elaborated digital value system in place can share information and track developments at many levels simultaneously. The entire Internet becomes a powerful market-tracking tool as well as a channel for communication and relationship building, far eclipsing any tools that managers have had at their disposal previously.
The Relationship Gap
It would be misleading to imply that the majority of high-traffic corporate Web sites are doing a good job of real-time relationship management today. In fact, most sites don't even measure up to the basic expectations for providing timely feedback to online visitors. A report by Rubric, an e-commerce software provider, cited repeated failures to capitalize on opportunities to build interactive relationships at some of the Web's most popular sites. Rubric gave fifty people $50 each to make a purchase at an e-commerce Web site chosen from among the top fifty most visited sites and recorded the performance of each site on a number of relationship-building measures.
The study focused on some basic relationship best practices, including cross-selling and follow-up e-mail to interested shoppers, second-stage personalization such as greeting return customers by name, and tailoring content to match previously expressed interests. Among the findings were the following:
Communication: Only about half of the sites surveyed tried to cross-sell products by asking customers if they would like to receive information on related items. And of the few sites that did get out follow-up e-mails, 84 percent did not make the 30-day deadline, widely considered optimal.
Personalization: That beacon of effortless e-commerce, personalization, also needs more work. Follow-up e-mails and content on return visits were infrequently tailored to the interests of a particular shopper. Moreover, only one in twenty-five sites personalized messages, and only one in four recognized repeat buyers.
Customer service: While 57 percent of the sites offered a self- service means of checking on an order's status, 40 percent didn't even respond to e-mail order inquiries.
Clearly, there is an enormous gap between the Internet's technical potential to deliver highly personalized, dynamic, and value-rich services and the actual experience of today's Internet users at most Web sites. Some of the barriers to realizing this potential spring from inflexible IT infrastructures at large corporations, and some come from the intrinsic difficulty and expense of keeping up with Internet growth rates and designing Web sites that are robust and flexible enough to keep up with demand. But most of the gap is strategic in nature. Managers haven't implemented a comprehensive and integrated framework for optimizing their company's online value -- in other words, they don't have a digital value system. Far from turning every online customer into a source of increasing value, the companies that don't respond to e-mail or deepen the personalization on their Web sites are holding the door wide open for click-hungry competitors to lure their customers into alternative trust orbits. The gap between Web potential and actual practice is still large enough to quickly drive any number of relationship-savvy contenders to the top of the customer value charts in emerging and existing industries.
One company that has seized this opportunity in health care information is Mediconsult.com. A close look at its strategic balance of information, trust, relationships, and services illustrates how these four elements, through their interconnections, fuel company growth and attract both partners and customers to a new digital value system.
What could be more personal than individual health concerns and medical questions? It might seem that many health problems would be too sensitive for discussion and treatment advice on the Web, but in fact the consumer demand for online health information seems to be insatiable. Health-related Web sites are one of the fastest growing and most frequently visited categories of online content. But only a handful of the thousands of Web-based health companies have managed to create a viable e-business model that generates increasing returns for all participants. Mediconsult.com aims to be one of those few by leveraging the power of exponential relationships in a trusted online environment.
Ian Suttcliffe, president of Mediconsult, emphasizes that his company has connected different stakeholders in health care since its founding in 1996: "We have focused on becoming a connection point for consumers, health care providers, and pharmaceutical companies. From the consumer point of view, there is an overwhelming amount of information and a pressing need for a trusted source that will help to sort through the most important insights and put them in touch with support groups and experts to answer specific questions. From a pharmaceutical point of view, it is extremely valuable to find a platform for interacting with motivated, self-selected individuals who have a direct interest in finding out about treatments. Hospitals and health care providers are looking for ways to follow up with patients and encourage them to take the initiative for wellness. Mediconsult connects with all of these groups."
In contrast to the lackluster performance reported in the Rubric study, Mediconsult makes an explicit promise that every e-mail will be answered within twenty-four hours. Visitors can sign up for a personalized, weekly e-mail newsletter. Enticements to real-time interaction and community building are prominent on each of the company's networks of health-related Web sites. The commitment to individual users is summed up by a prominent "Visitor Bill of Rights," spelling out Mediconsult's covenant with users:
The Mediconsult Network Visitor Bill of Rights
The following principles are the standards that we have set for ourselves to better meet your expectations of service and quality from our network. This is our commitment to you:
1. All of the Mediconsult Network web sites and technologies will support a superior visitor experience.
2. All of the Mediconsult Network provides serious, in-depth, trusted information and interactive tools across the most common chronic medical conditions.
3. All content adheres to sound editorial principles and utilizes the provision of evidence-based content from peer-reviewed sources.
4. All users can expect active and professionally monitored online communities -- bulletin boards, chat, live events -- where they will be treated with compassion and respect.
5. All editorial content is unbiased and is free from influence of sponsors or advertisers.
6. Mediconsult will provide full and complete disclosure of sponsor and advertising relationships.
7. All sponsorship programs are designed to add value to the visitor experience.
9. All Network sites provide consistent navigation that takes the visitor as quickly and intuitively as possible to the information or services sought.
10. All visitors can expect that general help and support queries will be answered within 24 hours by a Mediconsult professional.
This proactive approach to information, trust, and relationships has made Mediconsult the most "sticky" of the health care information services, motivating users to stay an average of 13.7 minutes on the site per visit and to consult more than eleven pages of information. This compares to an average duration of 3 to 6 minutes per visit at other health care sites. Visitor loyalty is high, with a large percentage of return.
Its success in attracting highly motivated and segmented consumer and health specialist traffic to the Mediconsult community has allowed the company to craft lucrative sponsorship and e-business partnerships. Noavritis, for example, sponsors a site dedicated to smoking cessation that is highly personalized to stimulate behavior modification as well as to promote its own branded medicine for kicking the nicotine habit. The Mediconsult-designed site encourages users to sign on for the complete program, including a personal roadmap for success, an online buddy, daily e-mails, and other motivators. Sutcliffe emphasizes that the relationship between the program and its sponsor is clearly indicated up front and that participants are well informed about any information that is collected based on their participation. Those who sign on have made the assessment that the value they receive is a good exchange for the information provided to the sponsor: "We have listened carefully to the 3.5 million patients and doctors who visit our site monthly, and they have clearly indicated that they prefer on-site-sponsored programs to traditional advertising banners. Sponsorship programs that provide real value to these visitors have proven very popular."
Mediconsult illustrates its value proposition to sponsors and potential partners by showing how Internet-based interactions reduce the cost of patient education and behavior modification without sacrificing the patient's sense of personal service or trust. The average cost of a one-on-one visit with a health specialist, for example, is $50, while the average cost of a physical group behavior modification program is $30 per participant per session. Furthermore, the self-reported results from participants who stuck with the online, personalized version of the smoking cessation program were better than the results of a similar group registered for a traditional bricks-and-mortar program on an outpatient basis -- and at a cost of only $3 per participant per session.
The company's ability to generate trust and build high-quality relationships by sharing health information illustrates that even complex digital value systems can be successful. But Mediconsult's own survey of competitive medical sites reinforces the conclusion of the Rubric study: there is a huge gap between the potential for online relationship formation and the practice of most online enterprises. Of one hundred e-mail questions directed at medical information sites, the Mediconsult survey team received only twelve responses, a dismal rate of return in an area so dependent on building trust and relationships with users. The quality of the responses was even worse -- eight of the twelve were automated, precanned answers, and only four were customized to reflect the particular interests of the questioner. The bottom line -- out of a hundred questions, the survey turned up just two answers that were directly relevant to the original query. Sutcliffe sums up the Mediconsult competitive advantage: "Service and quality on the Internet are relatively rare."
That is an understatement for the first generation of the so-called personalized Web sites. But more and more companies are taking steps to reinvent themselves and their online offers to present more visible value to the customer. The next sections look in more detail at how to move from superficial customization to a high-value online customer relationship strategy.
Bridging the Value Gap
There are four stages of customer interaction that combine simultaneously to broaden reach and expand individual responsiveness and reward. . . . At each stage, the customer becomes more directly involved with setting the parameters of the relationship and determining the level of personal disclosure. This, in turn, creates a positive feedback loop and increases the value of the next level of interactions.
The amount of shared information and trust correlates with the persistence and depth of the relationship and also with the particular stage that the customer has reached. It is important to note that the value of each relationship, which is created by the ER effect, continues to increase as more participants and more transactions enter the system.
Stage One: Personalization
As the Rubric study and the Mediconsult survey have clearly shown, today's Web sites don't even begin to take advantage of the relationship potential they have. On the one hand, tools to track site navigation and click streams are cheap and ubiquitous, enabling even the smallest start-up to compile an impressively complex visitor log file. Larger corporations can sign on with DoubleClick or other collaborative tracking services to obtain even more comprehensive data on aggregate and individual behavior patterns. But as companies are sucking up all types of data about customer online behavior, very few are returning any value to the individual customer. At best, the information is used to customize advertising and special offers to match the general profile that has been established for the customer. While these targeted marketing programs may stimulate higher click-through rates for advertisers, they don't do much to provide tangible rewards to the individual or to build a foundation for return visits or closer relationships. The limited amount of personalization generated by tracking online behavior does not compensate for the fact that companies are still treating the customers in batch mode and frequently not even using follow-up e-mail or return visits effectively to build up a sense of intensifying relationship. In other words, most companies would be better off investing in click stream analysis resources in order to answer their e-mail promptly and effectively.
Not only are the benefits of mass personalization fairly limited, they can become a customer disincentive. To the extent that sites do not clarify their information-gathering practices and provide some opportunity for user control, they become part of the untrusted Web. As we saw in chapter 5, behind-the-scenes data collection programs run the risk of alienating visitors and short-circuiting the trust that is so essential for moving on to a higher-value relationship.
Stage Two: Interactive Profiling
Initiation of active customer involvement marks the critical turning point between stage one and stage two of online relationship building. Engaging the visitor in the personalization process increases the quality of the information that can be collected and opens the door to more highly valued services. Customers choose to share information and fill out profiles in exchange for some services or other incentive, and so the terms of the relationship are more advanced, and the level of the information released tends to be significantly higher. Once the individual customer takes an active role managing the information profile and adjusting it on a regular basis, his or her awareness of the relationship expands, as does the merchant's opportunity to offer related products and services. At the same time, the self-service aspect of interactive profiling allows Web-based companies to scale their personalization to meet the demands of the market.
Interactive profiling is still a long way from a full digital value relationship in most cases, however. Thousands of profile-based Web sites have been stuck at stage two and subsequently have fallen by the wayside. Until trust is introduced into the relationship at stage three, users can easily substitute one personalized news service for another.
StageThree: Trusted Online Transactions and Decisions
The value of a relationship and the amount of trust that is placed in it typically increase in the bricks-and-mortar world as the personalization, level of expertise, and individual attention go up. The same is true in the online world: once interactions with a particular site are based on trust, the customer's willingness to extend the online relationship into future activities increases dramatically. Trust is an essential component of customer loyalty and the basis of delivering a variety of enhanced value-added services. As trust grows through experience, the customer shares even more information and participates in more e-services, creating a cycle of increasing value and responsiveness.
One example of the positive relationship feedback that can be built around trusted offers comes from the Dell Computer online order page. Like many strategically designed order sites, Dell's site provides a "Save the Cart" feature for its visitors. As we have seen, a large number of Internet users will browse through a Web site, select items, place them in a shopping cart, and then leave the site without completing the order process. Improved site design and higher trust will reduce the percentage of unconsummated orders, but there are still a fair number of shoppers who simply want to take more time before making the final commitment. This is especially true in the complex and rapidly changing field of computers and peripherals. Allowing customers to save their shopping carts on the site provides an incentive for them to come back later and take advantage of the selection efforts that they have already made.
Dell took "Save the Cart" one very interesting step further. It lets the hesitant customer set a password on the saved cart and choose to send it along to others with a personalized message. With the password in hand, friends or colleagues can access the original shopper's cart, look over the selections that have already been made, and either send some suggestions via e-mail or make adjustments directly to the items in the cart. This additional outside advice can be instrumental in validating a certain selection and moving the transaction toward completion. The people involved might be personal friends with some expertise in system configuration, colleagues who are going to share use of the system, or corporate IT personnel who have to support the system. The circle of trust is up to the individual customer, but obviously it includes Dell. Dell lets its customers leverage the trust built into their Web site to create tiny, transient information pools protected by passwords within which you can not only share information with others but also accumulate their advice.
Stage Four: Completed Fulfillment Cycles
With increasing participation and involvement by the customer, all the parties to an ongoing series of transactions can begin to rely on trusted, cumulative information that is always current and available to inform the next online activity. This stage of relationship has to incorporate both online and offline information and keep updates on all transactions in both realms. Along with its "One-Click" ordering to simplify the initial buy decision, for example, Amazon has also created a system of order fulfillment that incorporates rapid and continuous feedback on the status of the order to enhance the sense of relationship between customer and vendor. Not only does Amazon remember customer shipping preferences and alternate destination addresses, it keeps track of the progress of each part of the order.
Instead of traditional, one-on-one service in the bricks-and-mortar world, online customers demand instant gratification and personalization in the Web world. They tend to favor self-service as long as it truly saves them time and satisfies their needs, but they are quickly turned off by any lack of online responsiveness. Online customers expect multisided, real-time interaction to facilitate fulfillment cycles; customization of everything they need from A to Z; and continuous online accessibility of the necessary steps or any direct feedback about the steps.
This process generates increasing returns to the Web site, as more fulfillment cycles take place and more services are offered at the point of online interaction. Each successful repetition builds trust and increases the store of customer-related information and preferences. The more the customer gains from each repeat visit, the more return they offer the value system providers in terms of lifetime loyalty, purchases, and information pooling.
Bridging the gap between potential and realized relationship value is critical to online competition today. Companies cannot expect to keep customers loyal or understand the market demand for new products and services without constant information feedback and interaction with a growing community of customers. In fact, in the Internet economy, companies should not expect to go on existing without this feedback and interaction. As we have seen in the previous chapters, information and trust are important components of a digital value system, but the real payoff comes when companies use the insights gleaned from information pooling and online interactions to build closer relationships with their customers. Relationships drive online growth, and as companies rapidly attract new users, trusted and information-rich relationships are vital to keeping current users loyal and to deepening as well as broadening the product and service offerings.
Imagine a Web site that was measurably easier to use and more productive every time you made a return visit. What if you could accomplish four times as much in the same amount of time on your fourth visit as you did on your first? Would you keep coming back? The ER effect also builds customer loyalty by ensuring that the more the customer interacts online, the more payback he or she receives the next time around. Getting the customer into the midst of the action is an essential step.
The power of exponential relationships also builds on the natural dynamic of the Internet to turn every customer into a marketing partner through information sharing. Relationship-centered companies provide an integrated experience for their online customers that encourages this dynamic. They recognize that the traditional boundaries between receiving a marketing message, deciding to sample or explore more information about the product, and an actual purchase are no longer necessary. Finding, trying, and buying a product can now take place during the same online interaction. Potential customers can sample the service at the company's virtual help desk or discuss new product features with current users and then recommend the service to others. The initial marketing message and brand presentation incorporate multi-layered dimensions of the actual product experience through which individual visitors can navigate and interact at will.
Far from being a stand-alone function, real-time relationship building is a company/customer collaboration that requires buy-in and active participation from every part of the organization. Tracking online customer interactions and integrating them with every other form of customer contact are just two of the challenges. The Net multiplies the number of players exponentially, and managing these players so that they have independent multiparty relationships within a structured context is a valuable service.
Over the years companies have spent huge amounts of time and money trying to crack the perennial puzzle of what customers really want in hopes of delivering it faster and better than the competition. The rhetoric attached to this goal has changed over time to be sure, as have the tools and techniques used to pursue it. Companies may alternately focus on quality of services or on exceeding customer expectations to ensure a "delighted customer." Managers work to integrate their IT strategies and systems data with the customer-facing points of contact to create a "360 degree" profile as a way to understand the total customer. Behind the scenes, they install customer relationship management (CRM) software to automate the process of collecting and mining data. Formulas calculate the customer's lifetime value and compare the cost of new customer acquisition with the investment required for higher retention rates. Mass customization gives way to one-to-one marketing as the method for catering to individual interests and personalizing product offers.
Because of the popularity of the Net, it has become simultaneously more urgent and more challenging to figure out a winning formula for attracting and retaining customers. Web sites put increasing emphasis on personalization of marketing messages as the road to establishing a closer relationship with online customers. Interactive options proliferate as companies work to increase the stickiness of their sites and entice visitors to linger and buy. All of the these activities, from quality management to Web marketing, converge on the assumption that the more a company knows about its customers, the more responsive it can be to their needs, leading to customer value, loyalty, and long-term profitability.
Recently, however, the reigning assumption that close customer relationships are fundamental to corporate success has come under more critical scrutiny. It turns out that executives' inability to predict and prepare for the migration of customer value from minicomputers to PCs or from motion pictures to television broadcasts may stem at least in part from listening too closely to customers. As Clayton Christensen has documented in his research on the microelectronics and computer hardware industries, the stronger the ties to current customers, the more difficult it seems to be for companies to make changes in the product offerings and business models that might threaten those ties.
The inherent contradiction between meeting today's market demands and simultaneously keeping up with the innovations that are likely to launch emerging markets is at the heart of Christensen's book The Innovators Dilemma. After reviewing the experience of market leaders over the past several decades, Christensen concludes that close customer relationships are not a panacea and may even become a problem in keeping up with changes in the market. When new products are being developed and adopted all around them, sooner or later well-established companies that are only tuned in to their existing customer base will get blindsided by disruptive technologies that come up through a totally different market base. In fact, according to Christensen, the more that managers focus their efforts and corporate resources on satisfying their leading customers, the less likely they will be able to anticipate fundamental market and technology shifts.
"Good resource allocation processes are designed to weed out proposals that customers don't want. When these decision-making processes work well, if customers don't want a product, it won't get funded; if they do want it, it will. This is how things must work in great companies. They must invest in things customers want -- and the better they become at doing this, the more successful they will be."
This tendency can loom as a double whammy for companies struggling to retain their existing customers and trying to figure out where the next wave of technology adoption will take hold. Should market leaders stick with familiar products even in the face of major technology advances? Should they experiment with new offerings in hopes of attracting a more diverse customer group even at the risk of alienating their core supporters? These questions become more urgent as dot-coms spring up daily on the Web offering cheaper, faster, more personalized products and services that are attuned to the demands of the online environment.
Building on the ER effect, allows companies to multiply their marketplace connections without sacrificing services to existing customers. The Web represents a breakthrough in corporate ability to sense new developments that are otherwise totally outside of the scope of market intelligence and analysis. The advantage of Internet-based companies and the digital value system framework is that they combine reach and online personalization with relationships across a much broader group of visitors and customers than the group traditional marketing has access to. This broad group can be continually mined for information and trend analysis. This ability, combined with rapid reaction time and learn-by-doing skills, gives them a whole new range of relationships outside the scope of traditional companies and may well be the key to overcoming the innovator's dilemma.
It is no longer far-fetched to project the extension of the Internet into every company in the world and into the majority of households in industrialized countries. Instead of thinking of Internet users as a subset of their main customer base, managers have to gear up for business in a competitive environment where all their current customers are interconnected in various ways to the total subscriber base of the Net. For every company, no matter how large, the current customer base is only a small fraction of the overall marketplace. But it is the market at large, including that majority of "noncustomers," as Peter Drucker calls them, that is inevitably going to be the catalyst for far-ranging changes that will impact companies and their competitors. Drucker notes the following:
"Even the biggest enterprise (other than a government monopoly) has many more noncustomers than it has customers. There are very few institutions that supply as large a percentage of a market as 30 percent. There are therefore few institutions where the noncustomers do not amount to at least 70 percent of the potential market. And yet very few institutions know anything about the noncustomers -- very few of them even know that they exist, let alone know who they are. And even fewer know why they are not customers. Yet it is with the noncustomers that changes always start."
In an environment where product generations changed slowly and innovations took a long time to diffuse through to a level of mass adoption, having a marketplace blind spot was a vulnerability, but leading companies could devise strategies to pick up on changes and adapt their behavior and products accordingly. With the speed of development and diffusion today, this is not possible.
The ER effect builds on constant interaction among all the participants in a digital value system. Companies track the online responses of current customers and broader market prospects to drive rapid improvements in services. They analyze and react quickly to a much broader span of information about the needs and interests of the entire market, representing both current and prospective customers. This gives them the ability to make a continual stream of changes and adjustments that are very much in synchronization with the growth cycles of technology and product demand instead of risking getting too far ahead or getting left behind as things move in totally new directions.
Companies must become relationship brokers within their digital value systems. It is also essential for them to manage the relationships with business partners and online suppliers in real time because these links are now essential to the overall performance of the company and its ability to deliver on its customer commitments. One of the weaknesses of today's customer relationship management systems is that they are not designed to extend the enterprise on the back end to connect in real time via the Web.
The Net makes relationships more complex, multidimensional, and volatile at the same time that it offers unprecedented opportunity to translate millions of online interactions into ties that will strengthen over time. Within a well-defined digital value system, these relationships are based on a rich vein of information and a solid foundation of trust. The change from batch-mode customer relationship management to real-time online responsiveness gives companies the chance to provide visible improvements with each new interaction. By moving through the stages of online relationship building, companies can enhance both the precision and the "stickiness" of interactions with online visitors in order to turn them into customers and keep them coming back.
Large technology companies are reinventing themselves as service providers to become more flexible in reaching and reacting to a diversified marketplace. Online service providers can track the needs of a broader base of customers for a wider set of solutions. In particular, vendors of expensive, high-end technology, such as Oracle databases, are experimenting with the ASP model. As previous chapters have suggested and as the next two chapters discuss, selling services associated with products is the preferred strategy for growth and profitability in the brokered economy that has developed on the Net. So it makes perfect sense that the smartest of the large companies are moving in this direction. As will always be the case in the Internet economy, however, they are finding that dot-coms are staking out the same territory, bringing the competition for customer relationships and service revenues to a new playing field.
From Chapter 6 of Unchained Value: The New Logic of Digital Business by Mary J. Cronin. Harvard Business School Press. November 2000. Reprinted with permission.