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All the diversity of the animal kingdom, science tells us, comes from “tinkering” with just a few sets of genes that are common to all. The simplicity of the mechanism came as a complete surprise to researchers. We are here to assert that what works for nature can work for business, too. Tweaking what already exists avoids the all-or-nothing roll of the dice that companies frequently attempt when launching entirely new products or services. When a fair number of rolls come up “snake eyes,” companies can begin to distrust new ideas. Worse, burned companies may simply mimic what competitors are doing and get into price wars. We’ve discovered that it’s a lot smarter, and simpler, to adapt a product slightly—or offer a service at a marginally different price—to see what’s more appealing to customers, based on a series of small tests that take advantage of all the data companies can now collect on customers. For instance, a wireless telecommunications company that one of us worked with was looking for ways to boost traffic during peak hours, when rates are highest. By conducting limited tests of 15 different promotions and pricing plans, the company discovered that by pretty much giving away off-peak minutes, when the network is mostly unused anyway, it could get many more customers into the habit of always carrying their phones. Rolling out that promotion nationwide nearly tripled traffic during peak daytime hours. In our experience, if you adjust your products or prices to match their individual needs more precisely, customers of many types of products will spend 5% to 10% more than they would otherwise. At the same time, companies can trim marketing costs because they will come to understand who their most profitable customers are and will be able to target their promotional efforts more narrowly. A number of different industries, particularly those with large bases of retail consumers, are well-suited to the approach we’re describing, which we’ll call customer value management. Financial-services companies, for instance, can benefit because they have so many ways of interacting with customers, have so much information, and can easily test new features or prices. Mobile phone operators and long-distance carriers have access to lots of data on customer calling habits. They can tailor rate plans carefully, based on what they know about customers. Airlines already segment their fares based on flying patterns. Traditional retailers have an even bigger opportunity to figure out what their customers are interested in buying because they can analyze individuals’ purchase patterns for such a broad range of goods. But many companies don’t know what to do with all the data they have on customers. In addition, while companies are spending heavily on elaborate “customer relationship management” systems and databases, there has been very little focus on how to quickly make money from those investments in improving interactions with customers. What we’re talking about is focusing on ways to use data to identify opportunities in a couple of months and generate cash from them right away. The customer value management approach is even more important now that supply so far outstrips demand. Customers are scarce. Companies that can figure out how to profit more from the ones they already have will be in better shape than their rivals. The approach usually works best when companies do the following:
Brokerage firm Charles Schwab & Co. (www.schwab.com) does this kind of testing all the time, having employees manually handle the tasks that would be done electronically if a new feature was rolled out nationally; that way, Schwab can figure out whether the new service is worth it, before investing in building the information system that would provide it. Schwab sometimes brings people into one of its facilities to conduct its tests and sometimes tries out ideas on a small group of customers online. Obviously, you want to see if customers are interested in what you are offering before you roll out something new to the entire market. You also want to make sure your new idea doesn’t actually drive away customers. In addition, there is a danger that introducing a low-priced version of a product could cause your more profitable customers to switch to that product. You also need to figure out whether changing your pricing will cause you the kind of public-relations embarrassment that hit Amazon.com Inc. (www.amazon.com) when it began offering different prices for consumer electronics to different people online. People conversing in chat rooms realized what Amazon was up to, and the company eventually refunded money to those who paid higher prices. Customers in some industries—such as airlines, hotels, and telecommunications—accept that prices may vary significantly, so the only real way to know how your customers will react is to test carefully.
Most companies have information systems that are sufficient for figuring out who those customers are, by determining every customer’s “lifetime value,” or potential value. But many companies have yet to use the data to their advantage. You should start by building a profit model that can be applied to each customer and then update it as you learn more, both about the customer and about the accuracy of your model.
After the breathtaking audacity of the early Internet Age, this advice may sound like mere incrementalism. But the real power of the Internet is the ability to use customer data to treat customers individually and as communities. This isn’t incrementalism. It’s intelligence. In the current economic climate, companies that find ways to do this will be the ones to generate cash quickly and avoid possible extinction.
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START SMALL. Try out a bunch of ideas on small groups, perhaps 3% of the customer base. You might have 20 or so hypotheses but end up finding that only three new ideas are likely to resonate with customers. 