Chapter 10

The Payoff of IDIC: Using Mass Customization to Build Learning Relationships

Treating different customers differently could be prohibitively expensive, if every interaction and transaction had to be individually crafted as a tailored offering for a single customer. Fortunately, information technology can be used to improve and streamline the manufacturing and service delivery processes, so that an enterprise can deliver individually different products or services to different individual customers cost efficiently. This technique is called mass customization.

For the past 100 years, enterprises have standardized their products and services to take advantage of economies of scale. They have standardized the product and their messages about the product, and they have standardized its distribution. In the process, they have also standardized the customer. Even sophisticated segmentation strategies aggregate customers into groups a marketer defines as being alike, so the communication and the offer made to all customers in a “segment” can be standardized. By contrast, the customer-strategy enterprise, spurred by the rising power and declining cost of information processing, interactivity, and customization technologies, identifies each of its Most Valuable Customers (MVCs), remembers everything it learns about each one, and acts on that learning in all its dealings with that customer.

Mass customization can be defined as the mass production of goods and services in lot sizes of one. Stan Davis, who first coined the term in his groundbreaking book Future Perfect, says the term implies delivering “customized goods on a mass basis.”1 The principles of mass customization are not limited to physically produced goods; they can also be applied to the customization of services and communication. For some customers, being treated individually with personalized services and communication may be an even more important dimension than being treated to uniquely tailored products made possible by individualized production.2

How Can Customization Be Profitable?

The mechanics of mass customization are simple in theory. A mass customizer does not really customize anything at all—at least not from scratch. What a mass customizer actually does is not customization but configuration. The mass customizer preproduces dozens, or hundreds, of “modules” for a product and/or its related services, delivery options, payment plans, and the like. Then, based on an individual customer’s needs, the company puts different modules together to yield thousands, or even millions, of possible product configurations.3 When an enterprise embraces mass customization and determines how to modularize its offerings, it must thoroughly understand all of the component elements its products or services can be combined with, connected to, reduced from, or built onto. By determining the related products or services it could offer to customers, either by producing them itself or by forming alliances with other firms, the enterprise takes a critical step in the mass customization process (see Exhibit 10.1).

Consider how a credit card company might go about mass-customizing its credit card. Perhaps the company is capable of offering 10 different interest rates, 5 different annual fee schedules, and 4 different physical card designs. Altogether, in other words, the credit card company can make 19 different modules of the product. But these modules fit together to make a total of 10 × 5 × 4, or 200 different credit card configurations. This is the basic principle of mass customization, and it applies to manufacturing in the same way. A window manufacturer, for instance, could offer 5 different sash types, 10 windowpane styles, 3 grades of insulation, and 12 frames. That would be 30 modules that could configure a total of 1,800 different windows, many of which would never be requested but any of which could be configured on demand.

The biggest obstacle to mass-customizing a manufactured product, as opposed to a delivered service, is simply ensuring that different parts actually work with one another and can be fit together easily. But if a product’s components can be put together in a standardized way, or modularized, then the process of mass customization actually can reduce a company’s all-in costs, when compared to traditional mass production. Using modularization, building to order is inherently more efficient than building to forecast, because the enterprise need not take ownership of the parts any earlier than it needs them, and often the final product itself isn’t even built—or the parts even ordered—until the product has already been paid for by a customer. Mass customization can significantly reduce speculative manufacturing as well as inventory costs, and these two benefits are often enough to more than offset the cost of producing digitally combinable components. Indeed, cost reduction is one of the principle reasons manufacturing companies consider mass-customization technologies in the first place.4

Analogous cost reductions are possible when mass-customizing a delivered service. By giving a customer exactly what she wants—and especially if the enterprise remembers this preference for the next interaction—the entire transaction can be streamlined, made not only more convenient for the customer but more cost-efficient for the firm. In Australia, the St. George Bank automated teller machines (ATMs) will remember your “usual” transaction, if you have one. When you put your card into a St. George ATM and enter your personal identification number (PIN) code, the first menu item will offer you your usual cash withdrawal amount and receipt preference. This means the first question for returning customers will not be “What language do you prefer to use?” or “Do you want to (a) check your balance, (b) withdraw funds, (c) make a deposit, (d) transfer funds between accounts, or (e) other?” but instead will be “Would you like your usual $250.00 cash deducted from your checking account—yes or no?” Remembering a customer’s “usual” not only provides faster and more convenient service for him, but it also yields more efficient asset utilization for the bank—that is, the ATM asset will generate more value to the bank when customers use it faster, because more customers will be able to use the same machine in any given time period.

Mass customization of products offers similar advantages. For instance, Dell’s well-known mass-customization model, the first in the computer industry, provided the company with tremendous cost advantages when it came to managing its production. As one observer noted, “Dell Computers maintains no inventory. The production schedule is provided to all vendors a couple of days before production and allows the suppliers to provide just-in-time and just-in-sequence inventory. In this system, marketing and purchasing have to partner to ensure quick deliveries as well as develop better long term forecasts.”5

Not All Customization Is Equal

Management advisor Joe Pine literally wrote the book on mass customization.6 He and his partner, James H. Gilmore, have chronicled a business evolution—from creating standardized value through mass production to creating customer-unique value through mass customization. Pine and Gilmore have hypothesized four distinct approaches to mass customization:

Notice that adaptive and cosmetic customizers offer customers a better way to get what they want, compared to a mere standardizer; but also notice that these customizers have no memory of the personalization they do offer, thereby requiring customers to begin the specification process again with the next order. And that next transaction will depend entirely on the customer for its initiation. Therefore, adaptive and cosmetic customization offer no real sustainable competitive advantage against a competitor offering the same thing.

In contrast, notice that collaborative and transparent customizers maintain a distinct competitive advantage because they remember what a customer wants and can therefore better predict what she will want next time—reducing her need to make a choice. In many instances, the company takes a proactive role in offering to the customer what she’s most likely to want next. The customer is able to get from a collaborative or a transparent customizer something she can’t get elsewhere—even from a competitor that offers the exact same thing—unless she goes to the trouble (and risk) of starting all over in a new Learning Relationship.

Gilmore and Pine say that many companies resist mass-customizing their offerings and instead “manage the supply chain” by placing more and more variety into their distribution channels and leaving it to buyers to fend for themselves. Manufacturers maintain large inventories of finished goods, and service providers maintain excess personnel and provisions to meet potential demands. These practices add costs and complexity to operations. Customers then must sort through numerous alternatives to find the one that most closely approximates what they want. In many situations, a majority of buyers never do find an exact match for their own personal tastes; instead they settle for the one that seems to be the best fit overall, considering both the positives and the negatives. Gilmore and Pine call this customer sacrifice—it’s also known as the satisfaction gap—the difference between what customers want and what they’re willing to settle for (see Chapter 1). Producing greater variety in anticipation of potential, yet uncertain, demand often represents a last-ditch attempt to preserve the mass-production mind-set in the face of rapidly fragmenting markets, say Gilmore and Pine.8

EXHIBIT 10.2 Supply Chain versus Demand Chain

Mass Production	Mass Customization
Supply chain management	Demand chain management
Economies of scale	Economies of scope
Make to forecast	Make to order
Speculative shipping costs	Goods presold before shipping
Inventory carrying costs	Just-in-time inventory

An enterprise focused on building customer value, by contrast, brings information about an individual customer’s needs directly into its operations in order to achieve efficient, on-demand production or provisioning. This effectively turns the old supply chain into the back end of a demand chain.9 In this process, the firm diminishes the importance of product price in favor of relationship value (see Exhibit 10.2).

SPAR is the brand name for a chain of more than 12,000 grocery stores and outlets operating in 33 countries and generating some €27 billion in worldwide sales annually.10 The company refers to itself as a kind of “soft” franchise operation, because most of its stores carrying its brand name are owned and operated independently. SPAR is the wholesaler for the stores in the chain, providing most—but not all—of the products sold by the member stores. SPAR’s customers are the store operators themselves, and the company performs many services for them, in addition to wholesaling. For some storeowners, SPAR does the books and minds the payroll, for instance.

One of SPAR’s innovations worth a closer look has been implemented in Austria, a relatively strong market for the firm, where it has an 18 percent share.11 In 2003, SPAR Austria implemented a system that preconfigures its wholesale deliveries to a store in the same order in which the items are shelved in that store. So, as the stock clerk rolls the trolley down the aisle at her store she can effortlessly find the next items for the store’s shelves, simplifying the process and saving considerable time and cost for the storeowner. Importantly, the ease with which SPAR Austria’s products can be placed on a store’s shelves provides an incentive for the storeowner to rely as much as possible on SPAR rather than going to the trouble of dealing with an additional supplier. Even if for a few items the other supplier might offer a more advantageous price, getting goods onto shelves costs less with SPAR.

Of course, each store’s configuration is different, so SPAR’s preconfiguration requires the firm to maintain an up-to-date record of each store’s individual configuration. But it must also act on that information cost efficiently by changing the actual product delivery configuration for each store. Until this program was launched, the configuration of grocery products as they leave SPAR’s own warehouses was not something that would have been considered a “customer-facing” activity. Mass-customizing those configurations, however, so as to treat different customers differently is very definitely a customer-facing action and perfectly illustrates how difficult CRM makes it to draw a line between supply-chain and demand-chain activities. It has allowed SPAR to shift the core of its business from the price-driven “grocery-goods supplier” to a unique collaborative supplier of “goods stocked on your shelves,” which has a very different value. This is the heart of the payoff of mass customization: Collaboration leads to a new definition of the business a company is in, and this new business model defies commoditization, even when somebody else tries to do the same thing the same way.12

Mass customizers can adjust to changes in markets and technology easily, as they can rapidly shift their production, creating new products to accommodate changing environments. Fewer customer orders will be lost because mass customization always can, within overall capacity limits, build the products in demand. This contrasts again with mass-production factories, each of which has its own capacity limitations—limitations that usually cannot be offset by excess capacity elsewhere in the company. Distribution based on lower inventory levels at a build-to-order factory can prevent shortages caused in distribution channels. The result is fewer opportunity losses.13

Because customized products can be ordered with only the options customers want, customers will not be forced to buy a “bundled” option package to get the one option they really want. Even at a premium price, customers may still save money by avoiding unwanted options.

The mass-customizing enterprise is driven by observing and remembering individual customer requests and by comparing them to what other customers have requested. The success of mass customization as a relationship-building tool stems from the fact that a customer can participate in the actual design and development of her own product. As a result of her own collaborative effort, the customer is much more likely to be satisfied with the overall performance of the product and to find it costly to start over with a competitor, even when that competitor can do the same thing the same way.

Technology Accelerates Mass Customization

No matter how much value an enterprise adds, it is the value a customer adds for herself that makes a product or service worth a higher price. As the demand for personalized and customized products grows, more enterprises are offering build-to-order services to enable customers to configure products to their own needs—and improvements in technology have made it possible. Technology is enabling enterprises to meet their customers’ demands through mass production, but in ways that offer people their own choice of products that are personalized and made to measure.14 The Web, for instance, has become an ideal tool for mass customization, precisely because anything that can be digitized can be customized. The Web permits consumers to submit their specifications online directly to the manufacturer or sales executive.

Capital One Financial Corp. developed a successful mass-customization model that changed the credit card industry.15 The company is best known for gathering and analyzing consumer and customer data. Technology enables Capital One to observe and evaluate customer preferences and behavior and to do so dynamically, by market segment. The company can forecast trends and strategically shift its focus away from commoditized products, such as balance transfer cards, before the market is saturated with offers from competitors. Capital One planned for the obsolescence of balance transfer cards and plotted a course to move the credit card company into mass customization. This strategy enabled the firm to leverage its information resources to identify customers with low-limit, high-fee potential and to send these customers the marketing materials about products that would likely interest them, such as secured cards for people with poor credit. Using a database that contains the histories of all consumer interactions with Capital One has enabled the firm to customize its credit card offerings. Capital One’s CardLab also allows customers to add a personalized image to their card for free—well worth it, considering that it can increase use per card by 15 to 20 percent.16

Customizing products and services can yield a competitive advantage if the enterprise deploys the correct design interface and remembers its customers’ unique specifications and interactions. By linking an individual customer’s interactions with previous knowledge of that customer, and then using that learning to drive the production process, the enterprise takes an integrative approach to competition—one customer at a time.

Customization of Standardized Products and Services

When the executives of a company believe they can sell only standardized products, sometimes those executives bemoan their inability to participate fully in the strategic payback of the customer relationship revolution. It’s important to realize that even companies that cannot customize a product per se still can customize what they offer to individual customers and thus build Learning Relationships. A company may, for example, be able to change the product, add features, or combine it with other products. It may be able to sell standardized product, but provide various services that enable a customer to receive personalized attention before and after she buys the product, and make it possible for her collaboration with the firm to benefit her. The company that truly cannot mass-customize its products can look for service and communication opportunities to build in mass customization that makes the customer’s investment in the relationship pay off—for both the customer and the company. There are many customization options beyond the physical product itself, and many ways an enterprise can modify how it behaves toward an individual customer, other than customizing a physical product. These include:

• Configuration of the product or services surrounding it
• Bundling of multiple products or services
• Packaging
• Delivery and logistics
• Ancillary services (repair, calibration, finance, etc.)
• Training
• Service enhancements
• Invoicing
• Payment terms
• Preauthorization

The key, for any enterprise trying to plan ways to tailor its products and services for individual customers, is to visualize the “product” in its broadest possible sense—not simply as a product but as an object that provides a service, solves a problem, or meets a need. One widely cited Harvard Business Review article from 2005 suggested, for instance, that we should try to think of products as being “hired” by customers to do a “job.”17 This is exactly what we mean when we talk about visualizing the broadest possible definition of the service a product provides, or the problem it solves, for a customer. And this is where a strict adherence to the discipline of differentiating customers by their needs will pay off. What a customer needs and what she buys are often two different things. But if an enterprise has a full understanding of the customer’s own need, then that enterprise can often devise a customized set of services or products that will meet that need. Meeting the customer’s need is the service being performed by the enterprise, and the product itself is the means for delivering that service, or for doing that “job.”

This product-as-service idea can be thought of in terms of three successively complex levels in the set of needs a customer is trying to meet (see Exhibit 10.3):

As the definition of the customer’s need is broadened, and as the need set is expanded, the definition of the product itself will become more complex. With a more complex product, the enterprise can make customization more beneficial. At each successive level of product complexity, the enterprise has another opportunity to remember something that later will make a difference to a specific individual customer. Remember, when a customer base is characterized by customers with dramatically different needs, remembering an individual customer’s own personal needs or preferences will be highly beneficial to the customer. The more different the customers are in terms of their needs, the more benefit each customer will see in engaging in a Learning Relationship.

Thus, when customers have more uniform needs, as is particularly true of companies selling commodity-like products and services, the customer-strategy enterprise should try to expand the need set. Customers then will be seen as more diverse in the way they individually define their needs. The enterprise should assess which products and services it now offers that can cement the loyalty and improve the margin on its customers, even if the firm’s competitors offer the same products and services at the same price, customized in the same way. Simply improving the quality of a product or service, while advantageous in the short term, will not necessarily yield a competitive benefit over the long term. A customer-strategy enterprise instead tries to improve a product’s quality by customizing some aspect of it to suit the different needs of an individual customer in order to build a collaborative Learning Relationship with that customer. If the firm is selling a commodity-like product, what it actually customizes might not be the core product but the bundle of services surrounding the product or a configuration of additional products and services designed to meet an expanded definition of the customer’s need.

One of the easiest ways for a B2B enterprise to customize its product-service bundle, for example, is to remember how and when each customer wants to be invoiced. A credit card company with corporate cards, a phone company, or any other firm that sells a high-transaction product or service to other businesses might consider offering some customers the opportunity to tailor the invoices to weekly totals rather than monthly ones. Or a firm could provide the invoices on a quarterly summary basis, or even offer to allow the customer itself to specify which time periods to invoice at one time. Some banks are already offering some personalization capabilities for formatting of monthly statement options. Enterprises that already offer customized products can benefit by customizing these ancillary services even further.

In addition to the services and operations that naturally accompany a core product, most products and services can easily be associated with a customer’s other, related needs. When a customer buys a car from a car dealer, for instance, she will likely need automobile insurance, loan financing, a good mechanic, and, possibly, a carwash subscription. Catering to an enhanced need set means providing extra services to meet the customer’s broadest possible set of needs.

Some hotels, such as Hotel La Fontana in Bogotá, Colombia, cater to the international business traveler. If a guest has a trip to Bogotá planned, the hotel will set up her appointments in advance for her. All the guest need do is tell the hotel the names and phone numbers of the people she will meet. The deeper an enterprise can penetrate a particular customer’s needs, the more likely that enterprise will be able to cement a Learning Relationship with the customer, earning the customer’s loyalty not simply out of gratitude but because it is more convenient for that customer to remain loyal. As long as he is certain his own interests are being protected, the customer will trust the enterprise with a greater and greater share of her business.

Value Streams

Some enterprises believe they have nothing to offer their end-user customers to entice them to want relationships. A firm that produces a single product, infrequently purchased, is in this kind of situation. One strategy for a one-product company would be to create a “stream of value” behind the actual product sale. Here’s the choice: Find another customer for the product you sell, and then another and another, to generate more and more transactions; or find a related stream of products and services you could offer in order to get a greater share of customer from each of the customers you’ve already acquired.

Usually a value stream relies on some type of follow-on service, after the product sale, but it could also be an interaction designed to generate income later from customer referrals. The home builder who, in order to satisfy customers and generate more referrals, calls her customer the week before the one-year warranty expires and offers to inspect the home for any persisting problems is creating a value stream behind the sale of the home. The simple fact is that most people who build a home won’t build another any time soon. But having received this kind of service, they will likely tell their friends about their positive experience, and the builder could generate a much higher level of referral service.

We could cite other examples. A furniture retailer could create a different kind of value stream behind its infrequently sold products, selling a sofa with a free upholstery cleaning, to be scheduled by the customer one year after the initial purchase. That way, when it comes time to schedule the cleaning appointment, the retailer would be reestablishing contact with the customer, to the customer’s own benefit. At that point, the retailer could generate more revenue from the customer in any number of ways—selling a longer-term subscription to furniture cleaning, or selling items of furniture to go with the original purchase, and so forth. A clothing store could offer a dry cleaning or repair service for the clothing it sells. Customers who buy their suits from the store and pay an extra fee could have all of their dry cleaning, pressing, laundering, tailoring, and sewing done for the first two or three years, perhaps.

Note that in each of these hypothetical cases, the enterprise increases the revenue generated from each customer by expanding the needs set, and builds an interactive Learning Relationship at the same time. The value stream approach has been used to encourage warranty card registration, particularly by software vendors whose products are bundled into the original equipment manufacturer’s personal computer hardware. Those who mail in the registration (or who connect to register online) could receive 90 days’ free advice and help in putting the software to work. Value streams eventually lead to supplemental revenue streams for the enterprise. A customer is willing to pay for the ancillary product or service because it is valuable to her. But, meanwhile, the enterprise will be strengthening its ongoing relationship by exchanging information with the customer, as the value stream is delivered.

Mass customization, as we defined the term near the beginning of this chapter, involves creating a product by digitally combining a number of different modules representing premanufactured or preconfigured product and service components. The business processes that result in a product or service being rendered for a customer in a certain way can also be thought of, metaphorically anyway, as “modules” of the enterprise’s overall behavior toward a customer. The instructions that an enterprise follows in configuring different processes for different customers are business rules that allow the company to ensure that its own behavior is delivered in what amounts to a mass-customized way—that is, tailored, as a matter of routine, to each situation. As Bruce Kasanoff explains in the next section, monitoring how the business rules operate at an enterprise is an important task, especially for any customer-strategy enterprise.

Culture Rules

Mass customization makes a lot of intuitive sense, but aren’t there still some situations that won’t be covered by an enterprise’s business rules? What happens when a customer presents some problem or need for which there is no valid, preconfigured set of solutions that can be rendered in a cost-efficient way?

An enterprise can automate the contact report a sales rep has to file, but no computer can look into a client’s eye and judge whether to push for the sale or ask another question first. And no enterprise can write a business rule that requires employees to delight customers. The employees themselves have to want to do that. An enterprise’s secret sauce is its culture—the unwritten rules and unspoken traditions that define how employees actually approach their jobs. This is what guides employees when there is no policy—no applicable business rules. It’s what they do when no one’s looking.

Abraham Lincoln was once asked the secret of General Ulysses S. Grant’s success during a particularly difficult Civil War campaign. Always ready with an anecdote, Lincoln told the reporter it reminded him of a story about the great “automaton” chess player that had astonished Europeans nearly a century before. Popularly known as the Mechanical Turk, it had been constructed to resemble a mechanical man, dressed in a costume like a Turk, seated behind a wooden cabinet, and apparently capable of playing chess. It had defeated many human players, but after one celebrated competitor suffered two embarrassing defeats at the hands of the machine, he angrily wrenched off the cabinetry to peer inside and then rose up to exclaim, “Hey! There’s a person in there!” That, said Lincoln, was the secret of Grant’s success.

It is also the final, underlying secret of any business enterprise’s success when it comes to satisfying customers and ensuring they continue to create value. There has to be a person in there somewhere. No matter how well the business rules are architected, and no matter how many “modules” of product or service delivery are available to drive the mass-customization effort, human judgment always will have to be accommodated in the enterprise’s customer-facing processes. It’s impossible to serve customers well without it, and generally the more important decisions are the ones that require the most judgment. For a customer, the most vital problem or difficult issue often involves some type of crisis situation—a situation that is likely to be unusual or at least one that hasn’t already been anticipated by the enterprise. This means that almost by definition, any issue of utmost importance to a customer is likely to be something that falls through the cracks if an enterprise is operating entirely by predocumented processes and procedures. The enterprise won’t be able to specify it in advance. There has to be a person in there, capable of making the right judgment call.

As a result, nowhere does an enterprise’s corporate culture play a more important role than in dealing with customers, because doing this often requires conceptual-age, nonroutine skills such as empathy, creativity, and sensitivity.19 Many companies try to cut costs by outsourcing and automating their more routine customer service tasks. Most find out the hard way that it’s a big mistake to outsource judgment calls. Nor is it the best idea to hardwire all a company’s policies and processes entirely into “the system,” leaving no room for flexible responses to unanticipated situations.

Not long ago a friend of ours went online to book family trips on two different airlines for successive weekends. The first trip was on a well-established carrier with a great service reputation, but it is heavily unionized and often hemmed in by its own bureaucracy. It was a complicated itinerary involving coordinating with some other people, so our friend first booked her family’s outbound trip, then did some more calling to make sure the return flight was coordinated with others before booking it too. But guess what? When she booked the return flight, she realized that a round trip would cost less than either of the one-way trips just purchased. So she called the reservations office directly now, having been defeated by the online experience, and—you guessed it—“No, sorry, no can do.” Basically, she was told, she had bought the tickets online and a deal was a deal, that’s that. Then the agent even said something to the effect that “Yes, I know it’s unfair, but I am powerless to make the change; the system just won’t let me.”

Fast forward to the following weekend, and our friend was on the way to a different weekend destination with her family, this time on a new entrant carrier, one of the price competitors. You book your seat, and it’s a great low price but absolutely nonrefundable. The family ran into a traffic snarl and arrived at the airport way too late for the flight. Our friend found herself thinking that this was going to be a very expensive weekend for not going anywhere at all. But when the family got to the counter, an agent said something like “Sorry you missed your flight, but why don’t you just take a room at the airport hotel tonight and I’ll put you all on the 7 a.m. flight tomorrow morning? Tell you what, I’m also going to waive the $50 rebooking fee, and I’ll call your destination hotel, see if they can resell your rooms for tonight, maybe save you some money.”

Here are two different companies with two different ways to handle exceptional customer service situations. Although it’s important to do a competent job using efficient processes, good service cannot spring solely from processes or rules or systems. The important process for winning customer loyalty is customization, which has been the subject of this chapter. We need to remember that mass customization is simply a process for customizing more cost efficiently. However, it is in the exceptions to the rules, the unusual and problematic situations, that a company has to rely on individual people to make wise decisions. If an enterprise has the wrong employee culture, for whatever reason, good systems and processes actually might magnify this problem. Instead, particularly in the service sector, the enterprise wants front-line employees who are not only empowered to make decisions and take action (as the first airline’s employee was not) but also motivated to make those decisions in a way that is in the long-term interest of the firm (i.e., in a way that customers feel they have been treated fairly).20

The payoff for enterprises that engage in customization is twofold. In most cases, by employing automation and business rules to mass-customize its products or the delivery of its services, the enterprise actually can reduce its unit production costs, on an all-in basis, essentially because it will only make those goods that customers will have already bought. More important, however, customization will enable the enterprise to engage in a collaborative Learning Relationship with each customer.

Summary

Instead of expecting a customer to use what she knows about a company to figure out what she should buy, the customer-focused enterprise uses what it knows about the customer to figure out what she needs. In the process, such an enterprise increases the number of transactions it gets from a customer, makes it progressively easier for that customer to come back to that enterprise for purchases and service, and likely increases the profit per transaction.

Our story of managing customer relationships in the interactive era now takes a turning point. We have laid the foundation of relationship theory and provided a comprehensive examination of each of the four tasks of the IDIC methodology: Identify-Differentiate-Interact-Customize. We have shown the importance of Learning Relationships and the sensitive issues related to privacy protection. We have peeked at the technical tools that help to accelerate the relationship management process and reinforced how technology does not, and should not, manage customer relationships alone.

With Part Three (beginning with Chapter 11), we begin to look at what it means to manage the customer relationship process. We discuss the challenges an enterprise faces in measuring and maintaining a customer-based initiative and look at the quantifiable metrics associated with managing customer experiences and Return on Customer. We delve into the science of customer analytics as a method to predict each customer’s behavior and anticipate his needs so he will be treated the way he wants and remain a customer. Finally, we show how transforming into an enterprise that grows through building customer value requires a number of different infrastructure changes that will need to be addressed by managers who fully understand and support the underlying concepts we have been discussing so far—and so much more that we have yet to discuss.

Food for Thought

Glossary

Adaptive customization Offering a standard but customizable product that is designed so that customers can alter it themselves.
Business rules The instructions that an enterprise follows in configuring different processes for different customers, allowing the company to mass-customize its interactions with its customers.
Collaborative customization Conducting a dialogue with individual customers to help them articulate their needs, identifying the offering that fulfills those needs, and then making customized products for them.
Cosmetic customization Presenting a standard product differently to different customers.
Customer sacrifice See Satisfaction gap.
Customization Most often, customization and mass customization refer to the modularized building of an offering to a customer based on that customer’s individual feedback, thus serving as the basis of a Learning Relationship.
Demand chain A company’s front-end sales, marketing, or customer service operations.
Enhanced need set The capability of a company to think of a product it sells as a suite of product plus service plus communication as well as the next product and service the need for the original product implies. The sale of a faucet implies the need for the installation of that faucet, and maybe an entire bathroom upgrade and strong nesting instinct.
Mass customization See Customization.
Modularization Configuring a product’s components to put them together in a standardized way, in order to facilitate the process of mass customization and reduce company costs.
Personalization Refers to a superficial ability to put a customer’s name on something—to insert a name into a message, for example, or to monogram a set of sheets.
Satisfaction gap The difference between what customers want and what they’re willing to settle for.
Supply chain A company’s back-end production or service-delivery operations.
Transparent customization Providing each customer with a customized product or service without necessarily telling him about the customization itself.
Value stream A compilation of related products and services a company could offer to an existing customer in order to get a greater share of customer from each customer already acquired.

1. Stanley M. Davis, Future Perfect (Reading, MA: Addison-Wesley, 1987).

2. Amit Poddar, Jill Mosteller, and Pam Scholder Ellen, “Consumers’ Rules of Engagement in Online Information Exchanges,” Journal of Consumer Affairs 43, no. 3 (2009): 419–448; Ian Gordon, Relationship Marketing (New York: John Wiley & Sons, 1998).

3. P. T. Xu, “Integrated Vehicle Configuration System—Connecting the Domains of Mass Customization,” Computers in Industry 61, no. 1 (January 2010): 44–52; Don Peppers, Martha Rogers, Ph.D., and Bob Dorf, The One to One Fieldbook (New York: Doubleday Broadway Books, 1999).

4. Mass-customized products: Ron Manwiller, “Cost-Effective Customization,” Ceramic Industry 159, no. 7 (August 2009): 21–22; Mila D’Antonio, “Profiles in Leadership,” 1to1 Magazine, January 3, 2003, p. 34. Mass-customized clothing: Mila D’Antonio, “MyShape Sees Double Digit Growth Using Personalized Recommendations,” 1to1 Magazine, December 4, 2008; available at: www.1to1media.com/view.aspx?docid=31277, accessed September 1, 2010; Martha Rogers, “Custom Clothing Sets One to One Retail Examples,” Inside 1to1, June 16, 2003, available at: www.1to1media.com/View.aspx?docid=27182, accessed September 1, 2010; Mila D’Antonio, “Is Custom Apparel Finally Taking Off?” 1to1 Magazine, March 1, 2003, available at: www.1to1media.com/View.aspx?docid=26147, accessed September 1, 2010.

5. Jagdish N. Sheth, “Why Integrating Purchasing with Marketing Is Both Inevitable and Beneficial,” Industrial Marketing Management 38, no. 8 (November 2009): 865–871.

6. B. Joseph Pine II, Mass Customization (Cambridge, MA: Harvard Business Press, 1993).

7. For more on the four types of mass customization, see James H. Gilmore and B. Joseph Pine II, “The Four Faces of Mass Customization,” Harvard Business Review 75, no. 1 (January–February 1997).

8. James H. Gilmore and B. Joseph Pine II, The Experience Economy (Cambridge, MA: Harvard Business School Press, 1999); Pine, Mass Customization.

9. Per Hilletofth, “Demand Chain Management: A Swedish Industrial Case Study,” Industrial Management & Data Systems 109, no. 9 (2009): 1179–1196.

10. Figures as of 2008, available at: www.spar-int.com/, accessed April 2010.

11. Available at: www.spar-int.com/, accessed April 2010.

12. This idea of rethinking the industry and business a company is in was well described by W. Chan Kim and Renee Mauborgne in their book, Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant (Boston: Harvard Business School Press, 2005).

13. David M. Anderson, Agile Product Development for Mass Customization (New York: McGraw-Hill Professional Book Group, 1997). Also see H. Agbedo, “A Note on Parts Inventory and Mass Customization for a Two-Stage JIT Supply Chain with Zero-One Type of Bills of Materials,” Journal of the Operational Research Society 60, no. 9 (September 2009): 1286–1291, for more on the realities of material management in the electronics and automobile industries, which have found mass customization most profitable.

14. For example, best-in-class presenters at the 2010 MIT Smart Customization Seminar included toy companies (Build-A-Bear Workshop and LEGO Group), luxury brands (Louis Vuitton), apparel manufacturers (Archetype’s indiDenim and indiTailored), and cereal makers (mymuesli), to name a few. See documentation of MIT’s Smart Customization Seminar at http://scg.mit.edu/events/scg-events/84-the-mit-smart-customization-seminar-2010, accessed October 26, 2010.)

15. Capital One, of course, mass-customizes products that take the form of digitized information and, in that sense, has an easier challenge than, say, an industrial manufacturer. But the same principles apply to both: modularization, closing the feedback loop, improvement through increased service levels at decreased cost to serve, and so forth.

16. Adam Elgar, “Card Personalization Can Generate ‘Top of Wallet’ Use in Tough Economy,” CardLine 9, no. 15 (April 2009): 37; Judith Trotsky, “Future Bankers of the Year: Capital One Financial Corp.’s Richard Fairbank & Nigel Morris,” FutureBanker (December 1998): 106.

17. Clayton M. Christensen, Scott Cook, and Taddy Hall, “Marketing Malpractice: The Cause and the Cure,” Harvard Business Review 83, no. 12 (December 2005): 74–83.

18. Don Peppers and Martha Rogers, Ph.D., Enterprise One to One (New York: Doubleday Broadway Books, 1996).

19. Daniel H. Pink, A Whole New Mind (New York: Riverhead, 2005).

20. Excerpted and adapted from Don Peppers and Martha Rogers, Rules to Break and Laws to Follow: How Your Business Can Beat the Crisis of Short-Termism (Hoboken, NJ: John Wiley & Sons, 2008), pp. 113–115.