Managing Customer Experiences and Relationships Is the Path to Business Growth

As discussed in the opening section of this chapter, effectively leveraging technology to build relationships and enhance experiences of users of its products and services—especially for resource‐constrained startups—can lead a firm from marketplace irrelevance to marketplace dominance. For market leaders, processes that effectively leverage technology to build relationships and enhance experiences of users can provide continued competitive advantage and differentiation.

A case study that effectively highlights both these propositions is Netflix.²,³,⁴,⁵,⁶,⁷ Founded as a subscription mail‐order DVD company in 1997, it has redefined entertainment and now is the top digital streaming platform, with over 167 million subscribers. Through the preference data it has available on its users, Netflix knows even before its subscribers do that a program will entertain them. Where Netflix stands today is a far cry from when it beseeched Blockbuster in 2000 to buy it out for $50 million. Its turnaround came in 2003, after Netflix became profitable for the first time. With a profit of around $300 million and only 1.5% of the DVD market, Netflix looked at its current users to garner insight into who valued its service and why. It discovered both: It had a disproportionately large share of the indie film market compared to its primary competitor, Blockbuster, and a disproportionate share of its customers were seeking indie films. This discovery led Netflix to the insight that while receiving DVDs at home may be more convenient for subscribers and the lack of late fees may be desirable, these factors were not its differentiator with Blockbuster; it was unlikely that indie film viewers found Netflix more convenient than non‐indie film viewers. Rather, the differentiator was variety and the range of DVDs that Netflix could offer, and Blockbuster could not. Because a brick‐and‐mortar business is constrained by limited shelf space, Blockbuster focused on popular film offerings that served mainstream subscribers. As a result, the tail of the market—those seeking offbeat films—would often not find the offerings they preferred. Netflix, released from shelf space constraints, could focus on serving these subscribers.

By focusing on the needs of these users for offbeat DVDs, Netflix was able to proactively use its preference data to develop the world's most exceptional recommendation system, enabling users to discover offbeat offerings they did not know about. Mining a treasure trove of subscriber data on what its customers watched—when, how often, on what medium, for how long, and at what time—allowed it to efficiently offer a wider range of offbeat offerings to its targeted cluster of indie film lovers. Knowing what these indie film lovers would recommend to other subscribers with whom they shared tastes and preferences allowed Netflix to develop clusters and networks of customers and make mass‐customized recommendations, proactively offering subscribers recommendations from similar subscribers of what else to view. This approach led to a loyal base of customers but also rapidly attracted new users looking for indie films from a largely underserved segment.

With the evolution of technology, Netflix in time became a mainstream global entity and went on to broaden its target segment to include users seeking offbeat content and to redefine itself as an original content provider serving the immediate anytime, anywhere entertainment needs of subscribers. The deep customer insight garnered through analyzing decades of the sheer volume, velocity, and variety of intricate data on networks and clusters of subscriber preferences was the basis of this growth and transformation. Even today these data are a competitive advantage for Netflix to defend itself against new and intensifying competitive threats from Disney, Apple, Hulu, and others. Insights from these data enable Netflix to attain an original content success rate substantially higher than that of an average network program. Focusing on customer experiences and relationships with existing users, therefore, can provide a resource‐constrained firm with the insight to make strategic trade‐offs that help it prioritize resource allocations to activities that are likely to yield higher returns and is the foundation of successful firm growth and profits.

Strategic Customer Relationship Management Begins with Acquiring the Right Consumer

To be effective, firms should carefully consider and separate from the start which customers they wish to prioritize acquiring and others who are not their main target. The same dollar is better spent by a firm targeting customers who have a higher need for the firm's products or services and, therefore, are easier to acquire and retain, offer higher margins to the firm because they buy more frequently, buy more expensive options, and buy a range of options. In this context, it is important to recognize that consumer needs are heterogeneous and that different consumers value different product benefits. Whereas consumers may say they want everything in a product and for free, they recognize there is no perfect product for free and that they will need to trade off various product benefits to optimize what they truly want most. It is unlikely that any firm will have adequate resources of money, time, personnel, and so forth to provide all experiences to all customers and more effectively than the competition, especially the competition that chooses to focus on a particular need. Thus, firms must choose which customer needs to serve.

Customer data allow firms to group potential consumers into completely exhaustive and mutually exclusive clusters—that is, groups in which each potential consumer is in one group and only one group—based on the benefits they value most. Some clusters necessarily will be larger than other clusters in terms of how many consumers they contain, but this difference does not imply that a firm should target a larger (or more mainstream) cluster over a smaller one.

For instance, consider the market for prepared coffees. For some consumers, coffee is an add‐on to other more substantial breakfast items. For other consumers, the coffee is the main experience and food is the add‐on. Both sets of consumers are likely to say they value high‐quality coffee at a reasonable price. What they mean by high quality and reasonable price, however, is likely to differ, with the former group being more price sensitive than the latter group. A firm such as Starbucks may be ill advised to focus on the former group, even though that group is likely to be larger and more mainstream, whereas a McDonald's may be able to serve that target more effectively. Both firms, therefore, would benefit from estimating how valuable each type of customer may be to them.

To Acquire the Right Customer, Calculate Their Lifetime Value

The value of a customer can be calculated using techniques like those managers use to compare the lifetime returns of other types of capital investment opportunities and choose among them. Just as a manager who wishes to maximize returns on an investment in any capital project might compare the opportunity cost of investing resources to pursue one project over another, a manager could adopt a similar mindset to consider the opportunity cost of investing resources to pursue one type of target consumer over another. Customer acquisition is akin to acquiring an asset, and different groups of consumers are differentially valuable assets for different firms.

A useful decision tool to estimate how valuable a customer of a certain type is to a firm is to assess the lifetime value of that customer to the firm. This enables managers to think about the profitability of a customer into the future and move beyond the mentality of a one‐time immediate‐sale transaction. The only substantive difference between methods used to calculate lifetime returns of a capital investment and lifetime returns from an acquired customer is that, unlike a capital investment, a customer is not guaranteed to remain with the company indefinitely; therefore, a yearly retention rate adjustment must be made to account for the probability that the customer will remain with the firm. This valuation, along with other factors such as untapped segment size, segment growth rate, fit with the firm's capabilities, and attractiveness of the segment, can then be used by managers to make strategic customer acquisition decisions.

The lifetime value of a customer is the sum of returns or margins the firm expects from that customer discounted to its present value and adjusted for the probability the customer remains a customer for the given period, less the cost to acquire that customer. For example, consider that this year it costs Starbucks $100 to acquire a customer (AC) who values coffee as an experience as opposed to an add‐on. Starting the following year after acquiring this customer, Starbucks earns a margin (M) of $250 each year from the customer, which is the difference between the price and variable cost of providing any one product to that customer summed over the total number of products the customer buys. Let us assume further that the retention rate (R)—the probability a customer returns the next year—is 70%, and that the cost of capital (i)—or the current value of a future return—is 7%. Starbucks additionally estimates that this customer will stay with Starbucks for five years. The lifetime value of this customer for Starbucks would therefore be (–) acquisition cost + present value of [year 1 margin * probability the customer is retained year 1] + … + present value of [year 5 margin * probability the customer is retained through year 5] = –AC₀ + M₁ * R/(1 + i) + M₂ * R²/(1 + i)² + M₃ * R³/(1 + i)³ + M₄ * R⁴/(1 + i)⁴ + M₅ * R⁵/(1 + i)⁵ = $316.

Starbucks could also calculate the lifetime value of one customer who prioritizes price over experience. For Starbucks, the acquisition cost of such a customer is likely to be both higher than the acquisition cost of a customer who values experience and higher than what it might cost a firm such as McDonald's, which is set up to serve the price‐sensitive customer. Furthermore, the margins are likely to be lower because prices Starbucks could charge these customers are likely to be lower and costs of serving such customers higher compared to the competitor who is set up to leverage operational efficiencies at the cost of customer experience. As a result, the retention rate of such customers is likely to be lower for Starbucks compared to customers who value experience and compared to the competition. Starbucks could do these calculations not just for itself but also for its main competitor.

These calculations are likely to reveal two things: first, that the experiential customer may provide a higher lifetime value to Starbucks than a value‐oriented customer, and second, that the experiential customer may provide a lower lifetime value to McDonald's than a value‐oriented customer. Accounting for segment size and the fact that most firms are unlikely to be able to exhaust the entire segment and acquire every person in the segment, Starbucks may find that it is more remunerative for it to enhance experiences over operational efficiency, while the reverse may be true for McDonald's. Thus, unless there is a strategic reason for Starbucks to focus on efficiency (e.g., inefficiency is undermining the customer experience), Starbucks may be better off building experiences that its own type of customers value.

Technology Enables Mass Customization, But Managers Still Must Choose Which Experiences to Scale

Technology is now enabling firms to become more customer centric than ever before. But along with opportunity to become more customer centric—serving individualized needs at a mass level—comes the challenge of choosing which of a universe of possible experiences to prioritize with limited firm resources. In such situations, managers are often tempted to copy what their more successful competitors are doing. Instead, managers may be better served by choosing among experiences to mass‐customize those that its users value most and that are in line with building out the firm's differentiation or competitive advantage. Specifically, in any industry a firm is likely to be relatively more operationally efficient (e.g., McDonald's, Toyota, Samsung), more innovation driven (e.g., Wendy's, BMW, Apple), or more driven by the variety of experience (Burger King, Mercedes, Starbucks) than its competition. Managers should force themselves to recognize which one of these business models or disciplines provides them the highest competitive advantage against a specified set of competitors.

Keeping this differentiator in mind and what their customers value most (e.g., speed/convenience, innovation, variety), managers can choose which experiences to mass‐customize. The path to success is different for each of these business models; target consumers of operationally efficient firms, for instance, may value customization that improves speed and consistency of service at an individual level, whereas target consumers of variety‐driven firms may value the range of offerings they are provided at a customized level even if it comes at the cost of speed. This proposition should not be read to claim that firms should only invest in opportunities that build on their strengths but that they should excel where they have unique strengths while being adequate where competitors excel.

Starbucks is a customer‐centric firm that differentiates itself based on providing varied customer experiences.⁸ Through its app, it focuses on enhancing experiences of existing consumers. It enables them to buy their favorite customized beverages anywhere and at any time, with minimal waiting, even when they were not planning to make a purchase. A major functionality of the app, however, is that the technology proactively makes recommendations to create and satisfy an unplanned urge for a customer's favorite beverage and recommend associated products at an individualized level based on the customer's purchase history. Mobile order and pay make the process seamless for the customer, reducing the pain of payment by automating it and ensuring that the beverage is available as soon as the customer arrives to pick it up. The star rewards and drink rewards serve as an additional incentive to buy, and Merry Monday special promotions offer reward customers special offers to share or for themselves. These aspects make the Starbucks experience more enjoyable for their customers; they also improve operational efficiencies for Starbucks and allow the firm to serve these customers more seamlessly, further improving their experience. Customized cobranding with iTunes or the New York Times further delights the core customer and increases commitment of this customer to the Starbucks brand.

The McDonald's app functionally does almost all the things the Starbucks app does at an individualized level. On a superficial level, the two apps are indeed very similar. However, the strategic purpose of both apps and the kinds of experiences they prioritize are different. McDonald's still focuses on ensuring speed and consistency when it provides individuated recommendations to its consumers, offering promotions of popular items at times the store may be less full. Providing “deliciousness at your fingertips,” the app emphasizes exclusive deals that prompt purchases of their bestsellers and easy ordering. The Starbucks app instead prompts discovery and purchases of varied, even lower‐selling items the customer may come to like based on their past purchases. The McDonald's app customizes experiences for the masses in a manner that is driven by making the firm even more operationally efficient because its target consumers value convenience, ease, and value, therefore driving unplanned sales toward bestsellers. In Europe, the Exxon app does something similar. Through mobile pay, Exxon focuses on the convenience and ease of its customers and allows them to fill up and be on their way as quickly and conveniently as possible; it also makes recommendations about where customers can fill up sooner and more quickly because this is the benefit their consumers value most. The goal of the Starbucks app instead is to make experiences even more discovery driven because that is what their target consumer prioritizes; therefore, it drives unplanned sales toward variety, new products, and high‐margin unique purchases. The important takeaway here is that functionality differs; many apps may look similar, but brands must prioritize the delivery of those experiences their customers value most. Functionality should be driven by the needs of target consumers and the firm's competitive advantages in serving its consumers.

Thus far we have argued that (a) a focus on improving share of wallet of one's target customers can increase share of customers in the marketplace and may be the pathway to rapid and sustained business growth; (b) because firm resources are limited and customer needs are heterogeneous, firms have to choose from the start which customers to acquire and, therefore, which experiences to optimize; (c) the largest segments of customers may not be the most profitable for a firm and just as any manager compares returns on different capital investments, managers should compare the lifetime value that one customer in any segment delivers and from that calculate the firm's business opportunity; and (d) while technology is fundamental to enhancing customer experiences, firms have a universe of experiences they can deliver. Managers should mass‐customize experiences that arise from and build on their key differentiators and serve their customers’ most important needs.

We now turn our attention to how managers should execute customer experiences once they have chosen who their customers are and which experiences to mass‐customize.

The Customer Journey: Executing on Customer Experience

A popular aid for organizing tactical decisions regarding when, how often, and what experiences to deliver to customers is the customer journey framework. The customer journey framework allows firms to design customer experiences and build digital capabilities that map the consumer's mindset at each phase of the decision process to the firm objectives that can be achieved most effectively given the consumer mindset in that decision phase.

The consumer decision process typically moves from a preliminary stage in which the consumer may have a latent need, or one is created, to a stage where the consumer becomes more aware of the need and actively begins seeking a solution to that need, to engaging in a consumption activity and fulfilling that need, to reflecting on that need post consumption. Consider, for instance, a consumer's need to travel. The consumer may begin “dreaming” about travel. This latent need may become overt after they view travel posts on Instagram or Facebook from friends, colleagues, or even strangers. As the consumer becomes more conscious of this need, they might enter the next phase of “research and planning.” In this stage the need experienced by the consumer becomes more concrete, and the consumer begins to search for viable travel options—dates, locations, travel itineraries, and so forth. The consumer next makes a purchase by booking the travel. They then consume the product or service and experience a stay at their travel destination. The final and fifth stage is post‐experience reflection when they might post about their experiences to others. For any firm, managing customer experience begins with phase one of this decision‐making process and continues through phase five, with each phase offering opportunities for the firm to influence new customer acquisition and retention. Using technology to create customer experiences, it may be possible for firms to merge several of these decision‐making phases—for example, by evoking a need in a consumer and moving them toward the consumption process more quickly.

In each of these decision phases, the consumer has a particular mindset and approach to information. In the dreaming phase a consumer may be looking more for entertainment and, therefore, be more open to emotional connections with the firm. As the consumer moves toward research and planning, and then purchase, the consumer may become more deliberative and look for rational reasons to educate themselves and then make the purchase. Once the consumer experiences the product or service and engages in post‐purchase reflection, they may again become more emotional and be swayed by and more likely to share their emotional experiences with others.

A firm's goals in connecting with the consumer across these five decision phases moves from entertaining the consumer, to educating the consumer, to converting the consumer, to persuading the consumer of the value of the experience, to inspiring the consumer to inspire other consumers to try the firm's offering. Furthermore, different social media platforms, social media content, and other technologies connect more effectively with different mindsets of consumers and accomplish different firm goals. For instance, viral videos and Instagram may help a firm connect more effectively at an emotional level with consumers, promote dreaming, and create an initial awareness, interest, and desire to buy among consumers. Search engines may instead connect more with the rational consumer and facilitate research, planning, and purchase.

To create a digital plan, managers can build a matrix in which they map firm goals to consumer mindsets and in turn to the type of social media that best accomplish firm and consumer goals jointly. Consider, for instance, the Accor group, a global, asset‐light (mostly franchised or managed properties) hotel conglomerate with over 500,000 rooms that spanned the economy, mid‐level, and luxury segments across nearly 4,000 properties, 17 brands in 92 countries and 6 continents by 2015. At this time, Accor discovered that the entire hotel landscape had changed. Consumers were more digitally connected and had higher expectations than ever before. Accor's main collaborator—the travel agent—had now become competitors and taken the form of online travel agent (OTA), and aggregators such as Booking.com and Hotels.com were putting price pressure on the conglomerate. In addition, there was new competition in the form of two‐sided platforms such as Airbnb serving consumers seeking authentic travel experiences. With a value proposition promising customers reliable consistency across properties within each brand, the challenge to create enriching travel experiences that offered consistency across the parent brand and within each brand globally, as well as an authentic local experience, was considerable. Accor designed these experiences by employing content strategies along the customer journey that mapped the firm's goals to the consumer mindset.⁹

The problem Accor faced was that they ended up paying huge fees to Booking.com and other similar OTAs or aggregators when consumers booked through these agencies. Consumers tended to book through these agencies because they were able to offer better preference matching to consumers across hotels in all locations; they also offered more trust and certainty regarding what the consumer would find once they arrived at the property by presenting reviews from other consumers. The challenge for Accor, therefore, was how to get travelers to book directly through Accor property websites. Knowing that its differentiator from other hotels was consistency and reliability of experience, Accor set out to mass‐customize reliability. For those consumers who booked directly, Accor was able to determine the types of guest amenities they preferred. Accor also was able to offer locally authentic entertainment and other options to travelers, such as cooking classes or visits to a spice market depending on the property, while still ensuring consistency of the overall hotel experience. Finally, Accor was able to personally delight consumers, especially those consumers whom they could identify as regulars and those who were influential on social media, by designing special events for them such as a birthday gift or other freebies. These actions led these influential consumers to generate word of mouth about their experiences on social media, which in turn helped with new customer acquisition. Finally, to ensure consistency, Accor set up systems to monitor complaints online and offline for each of its properties on a real‐time basis and monitor the speed at which these were addressed to ensure that consumers who came through OTAs would leave satisfied and be more likely to write positive reviews, helping to manage customer churn.

Accor's digital plan included actions to drive traffic to the accor.com website, host interesting user‐generated content to increase conversion of visitors to the website, put Accor at the top of review sites, anticipate guest online venues, and share posts from platforms such as TripAdvisor, Instagram, and Pinterest to further create direct connections with consumers who are in the dreaming, planning, or booking stages. Accor additionally created an app to host content and interact with user‐generated content in real time, planned activities to surprise/delight influencers, and captured even more user‐generated content while consumers were experiencing their stay. Post stay, Accor continued to connect with its consumers by managing content on Google, Accor, and TripAdvisor and by using insights from the user‐generated content to further enhance consumer experiences that future users would be more likely to share.

This example highlights the strategic nature of the decisions Accor made to create specific experiences that served its target consumers’ needs for a consistent experience that incorporated local attractions and authenticity that could generate positive word of mouth. The decisions were based on an understanding of the major challenge faced by Accor—that OTAs had eroded its value proposition of offering the ultimate in trust and consistency—which Accor excelled in addressing by focusing on its strengths. The plan also put Accor on a more level footing relative to platforms such as Airbnb that were all about individuated experiences; Accor could not have customized the guest experience to that extent. Thus, Accor successfully customized mass experiences to create stronger connections with its existing customers and used their word of mouth to attract similar customers, allowing it to take on the competition by OTAs that previously threatened to commoditize Accor.