Step 1: Diagnostic Questions

We have found the following questions to be a good starting point for thinking about a connected strategy. These questions might appear simple, almost naïve, at first. As we found out in our discussions with many companies, however, they are surprisingly valuable.

• How often do you currently connect to your customers?
• What kind of information do you receive about your customers’ needs?
• How does information flow from the customer to you? For instance, does the information flow rely on the customer taking the initiative, or does the information flow happen in a more continuous and autonomous manner?
• How long does it take for a customer need to reach you? (How much time elapses between a customer’s realization that he or she wants or needs your product or service and the receipt of this information by your organization?)
• How long does it take for you to react once you have received a customer need?
• What do you learn each time a customer connects to your firm? How are you integrating these episodic interactions into a single, connected experience for your customers?

Step 2: Brainstorm the Potential of a Connected Strategy

Now let’s get a bit more playful and start imagining what a connected strategy could do for your organization. The cases discussed in chapter 2 and the podcasts featured on connected-strategy.com might provide you and your team with some sparks to ignite creative discussions of the potential of connected strategies for you. The following prompts will also help you move from knowledge to action.

Imagine a world in which customers could instantaneously communicate their needs to you. You are by their side as they go through life, anytime and anywhere. How would this increase in connectivity allow you to improve how you serve your customers? More specifically,

• How could you use this information to increase the willingness-to-pay of your customers?
• How could you use this information to decrease your fulfillment costs?

Next, imagine a world in which you know a customer need even before the customer knows this need herself. Not only are you walking alongside her, but—given permission by your customer—you have visibility into her bank accounts and even some of the inner functions of her body. For example, your customer might need to save for retirement but has not given this matter any thought and presently is in debt. Or your patient might have a mild narrowing of the coronary arteries but is not currently showing any symptoms.

• How could you use this information to increase the willingness-to-pay of your customers?
• How could you use this information to decrease your fulfillment costs?

Step 3: Start Identifying Drivers of Willingness-to-Pay

The willingness-to-pay for a product or service is a result of three factors: how much a customer likes your product or service once he has it; how easy it is for him to obtain it; and how expensive it is to own the product. We will refer to the first part as consumption utility, the second part as accessibility, and the third part as the cost of ownership.

Consider consumption utility first. Consumption utility comes from various attributes of a product or service. For example, legroom (for air travel), the distance between two charges (for electric cars), weight (for bicycles), pixel count (for cameras), size (for clothing), and entertainment (for movies). The many possible attributes can be categorized into two groups:

Performance attributes:  Performance attributes are features of the product or service that most people agree are better. For example, we all prefer more legroom, longer distances before recharging, lighter bicycles, higher pixel resolution, and so on.

Fit attributes:  With some attributes, customers do not all agree on what is best. Some viewers like to watch House of Cards, while others might not. Some people enjoy a great steak, but vegetarians do not. When it comes to clothing, we have different body shapes and need differently sized clothes. Hence the term fit for these attributes.

Next, consider the accessibility of the product or service. Customers often face an inconvenience in obtaining the product or receiving the service. Economists often refer to this component as transaction costs or friction. Everything else being equal, we prefer our food here (as opposed to three miles away) and now (as opposed to after a thirty-minute wait). The following are the two major components of accessibility:

Location:  How far does your customer have to travel to get your product or service?

Timing:  How long does your customer have to wait for your product or service?

The third and final component of willingness-to-pay is the cost of ownership. As customers, we derive more value from a product that lasts longer and thus is cheaper on a per-usage basis. No matter whether it’s electronics, sports gear, furniture, or kitchen equipment, products wear out, become obsolete, or need to be replaced for other reasons. Other elements of the cost of ownership include the need for maintenance and repair, benefits from potential warranties, and everything else that customers need to pay for when using the product.

Worksheet 3-1 summarizes these dimensions of willingness-to-pay and will help you keep track of the relevant drivers in your business environment. The drivers of willingness-to-pay are the most important variables from the perspective of your customer. Some of them are obvious. We all want greater products or services right here, right now, and, ideally, free of charge.

Don’t stop there. At this point, consider the work that you did as part of step 2 when you brainstormed about immediate information availability and ways to know a customer’s needs before even the customer becomes aware of the need. By having a connected relationship with your customer, including instantaneous communication, you can hopefully identify more subtle needs (and thus alternative drivers of willingness-to-pay) than “right here and right now.” For example, you might realize that your customer is afraid of planning for retirement because this would require difficult discussions with his spouse, or that your patient really felt sick multiple times before showing up to the emergency room but did not bring this up with the primary care physician during a regular visit because there wasn’t enough time. Those are the nuggets that will be the starting point for designing a connected customer relationship, which we will help you do in the second workshop.

WORKSHEET 3-1

Identify willingness-to-pay drivers of your customers

Step 4: Sketch the Efficiency Frontier for Your Industry

Companies cannot be good at everything. They face trade-offs in their business. For example, they trade off performance attributes and the costs of providing products or services. More legroom means higher willingness-to-pay but fewer passengers per plane and higher costs per passenger. Similarly, there is a trade-off between the cost of providing goods and services and how inconvenient it is for a customer to access them. As passengers, we would love to have a car waiting for us at every corner of town—it would translate into convenient access. But it also would mean lower vehicle utilization and higher costs.

Such trade-offs can be illustrated graphically using the efficiency frontier framework discussed in the previous chapter. Worksheet 3-2 helps you draw the efficiency frontier in your industry through the following steps:

1. Pick your most relevant competitors.
2. Rank them in order of the willingness-to-pay that their products or services create. In other words, put yourself in the shoes of a typical customer and ask yourself which product or service is the most desirable, ignoring the price you would have to pay for it. For example, if someone else paid for it (though you would still have to do the purchasing, transaction processing, and waiting), would you rather receive a Mercedes C-class, a BMW 328, a Tesla Model 3, or a Lexus IS? You can refer back to step 3 of this workshop and ask yourself how well your competitors perform along the dimensions of performance and fit attributes, location, timeliness, and cost of ownership. An accurate, absolute measurement is not required—relative comparisons are sufficient. If you believe that the willingness-to-pay is very different for different market segments, draw a separate efficiency frontier for each market segment.
3. Rank your competitors and yourself in terms of fulfillment costs. Ask yourself, What is the average cost per transaction that you have versus your competitors? Note that this is the average cost. For instance, one firm might spend a lot on advertising, but if it has many customers, it can spread this cost over many transactions, affecting its average cost per transaction only by a little. Again, a simple rank ordering is sufficient at this time.
4. With this information, you can position yourself and your competitors in worksheet 3-2. Next, draw the line that represents the efficiency frontier. This is the group of firms that are farthest up and to the right on the plot—that is, the firms that have the highest willingness-to-pay for any given level of fulfillment costs (or, conversely, that have the lowest cost for any given level of willingness-to-pay).

WORKSHEET 3-2

The efficiency frontier for your industry

Once you have filled out worksheet 3-2, you can think about the following questions:

• Where are you relative to the efficiency frontier? Are you on the efficiency frontier, or are there firms providing a similar (or even higher) willingness-to-pay while enjoying lower fulfillment costs? Recall our comparisons between meal-kit deliveries and farmers’ markets and between ride hailing and cabs. Not every firm in an industry is likely to be on the frontier.
• If you are not on the efficiency frontier, what efficiency improvements do you plan to pursue in order to reduce your fulfillment costs?
• Assuming you are on the efficiency frontier, do you feel that you are in the right spot on the frontier? Or do you feel that you should rethink the trade-off between willingness-to-pay and costs (e.g., sacrifice some efficiency to provide a better product or service)?
• What are the trends in your industry? Is there a pressure to lower costs (moving to the right), or do you see your firm win over its rivals by providing products and services with a higher willingness-to-pay (moving up)?
• Are there new technologies that have allowed some of the firms already in the industry or potentially new entrants to push out the frontier? Do you see new business models breaking the trade-off between willingness-to-pay and fulfillment costs?