Now consider Dell in light of the classic distinctions between goods and services. Goods are standardized for anonymous customers, while services are customized for a particular individual—check. Goods are inventoried, while services are delivered on demand—check again. Finally, goods are tangible, while services are intangible—and part and parcel of Dell's interaction with customers is the intangible service of helping each one determine exactly what product permutation he, she, or it needs. Checkmate. So even though at the core of the sale lies the physical hardware, selling the personal computers and other products themselves, customized and on demand, means delivering a service. As with all services, its offerings are inherently customizable, so Dell's capabilities put it in a better position to stage experiences for individual customers—something Michael Dell stressed as a priority when he returned to the CEO seat in 2007.2
Both goods and services, then, automatically shift up the Progression of Economic Value when they are customized, as shown in figure 4-1. (This shift does not occur for true commodities, which, being fungible, cannot be materially changed, much less customized.) As a result, companies create offerings more relevant to the wants and needs of individual buyers, differentiate their goods and services from the sea of look-alike competitors, and thereby increase the value provided, and thus the price charged, to users and clients. Businesses that wish to forestall commoditization by entering the Experience Economy should first get their act together by customizing their goods and services.
Figure 4-1: Shifting up the Progression of Economic Value
Mass Customization
Companies like Dell and Progressive mass customize their offerings. Mass Customization means efficiently serving customers uniquely, combining the coequal imperatives for both low costs and individual customization present in today's highly turbulent, competitive environment.3 Of course, ad hoc or craft customization, in which a company must determine what to do differently every time it changes operations, achieves the same benefits, but at a higher cost. Companies that hope to gain the best of both worlds—the “mass” and the “customization”—must modularize their goods and services. This practice lets companies efficiently produce standardized modules but combine them in different ways for different buyers, just as Dell does with the hardware and software components that go into its offerings.
To understand modularity, think of LEGO building bricks. What can you build with LEGOs? The answer, of course, is anything you want. This is because of the many different sizes, shapes, and colors of bricks as well as the simple, elegant system of tabs and holes that enables them to be easily snapped together. These two basic elements—a set of modules and a linkage system that dynamically connects them—define the modular architecture that equips a company to mass customize.4 This architecture determines the universe of benefits that a company intends to provide for customers and, within that universe, the specific combinations of modules it will deliver at this time, to this particular customer. In the case of Dell, the modules are the individual electronics components—CPU and memory chips, disk drives, USB ports, software, and so forth—and the linkage system is the computer motherboard to which everything connects; the composition of each computer can differ greatly from customer to customer.
Companies like Progressive Insurance that mass customize services build their modular architectures not out of tangible components but with process modules. Think also of FedEx. Every package it picks up and delivers is unavoidably unique, having different contents that must start at a different point A and end up at a different point B. FedEx accomplishes the task—overnight, at unbelievably low costs—because of its modular route system. A van picks up a package at point A and brings it and all the other ones it picked up to a local depot; that depot places all of its packages on big trucks to head to a larger depot at the airport; all those packages head out on airplanes to FedEx hubs such as Nashville, and then, with the proper sorting and dispensing all along the way, the package heads back out on the modular routes that get it to point B.
Or, because that's really the only way FedEx could supply its service (there is no mass produced alternative), consider CEMEX, of Monterrey, Mexico, one of the largest concrete companies in the world. Concrete may be more or less treated like a commodity, but CEMEX specializes in mass customizing the service delivery of its ready-mix concrete to its customers. Individual building sites often have tight deadlines for pouring the concrete to fit the weather and their construction schedules, with traffic conditions often a significant impediment to on-time delivery (think Mexico City). So CEMEX developed an operational system called GINCO (an acronym standing for “integral management of concrete” in Spanish) to handle all of its logistics, including GPS locators on each of its trucks. Because the company loads trucks with concrete mixture (in slurry form) and then tracks their every move, customers can now order the product with as little as two hours' notice. GINCO finds the trucks with the proper mixtures in the correct amounts and then dispatches (rather than schedules, the favored tool of mass producers) trucks to the right place at the right time. CEMEX creates customer-unique value from its customized delivery process more so than its standardized concrete.
In addition to a modular architecture, Mass Customization requires an environmental architecture, again composed of two elements: a design tool that matches buyer need with company capabilities, and a designed interaction within which the company stages a design experience that helps customers decide exactly what they want. Without this environmental architecture, companies often overwhelm potential buyers with so many combinations of modules that they can't figure out which one makes sense. Design tools such as Progressive's laptop claims adjustment system, Dell's website configurator, and even CEMEX's GINCO software help manage the complexity that, on the one hand, allows companies to tailor their offerings to individuals' needs but, on the other hand, often gets in the way of customers' determining exactly what they want.
When in the 1990s its business began to turn from make-to-stock to make-to-order, window manufacturer Andersen Corp. of Bayport, Minnesota, developed a multimedia design tool called the Window of Knowledge to help its distributors collaborate with consumers on the latter's own window designs. The computer software featured an icon framework representing more than fifty thousand possible window components that allowed consumers and distributors to create and see exactly what potential designs would look like. (It also displayed videos of beautiful, cloud-swept vistas in the background, making more than one customer respond, “Wow.”)
Providing the design tool alone was not enough, however. Andersen found that success depended on training its distributors to use the tool itself and, just as important, to use it to interact with customers on a personal basis. Over several years, those distributors that were properly trained on the tool increased their sales of Andersen windows by more than 20 percent; those distributors that either did not accept the tool or did not accept the training actually decreased their sales of Andersen goods. The beauty of Andersen's approach—since supplanted by software for its distributors called iQ, for Intelligent Quote, and a web-based tool for its consumers—lay in its ease of use: people could easily sift through a seemingly limitless number of possibilities. Had distributors instead presented all of them, consumers certainly would have found the interaction an overwhelming experience.
In situations with more limited possibilities, companies may fully disclose all possible combinations and let customers sort through them all. Such a “giant menu” approach need not be unpleasant. In fact, companies can make this interaction a unique experience by enriching the ways in which someone sorts through its menu or catalog, as when, for example, Land's End affixes Post-it Tape Flags in its catalogs to allow customers to easily mark pages before ordering, or when Amazon.com displays “most recently viewed” books for customers browsing online.
A second approach to designed interaction progressively reveals the possibilities in segmented catalogs,
fill-in-the-blank menus, selection matrices, configuration or design tools such as Andersen's, even the proverbial blank sheet of paper. With its website configurator, Dell lets customers begin the customization process by selecting a starting point from among a set of fairly standard packages with varying features. Once they've decided on something close to what they need, then they can customize it further by selecting various components, including monitor, speakers, operating system, support services, and so on, with only ever a few choices on each web page. Design tools such as these give customers an opportunity to adjust selections until they eventually determine exactly what they want.
The third approach to designed interaction deliberately conceals the design tool from customers. Why would a mass customizer do such a thing? It's because sometimes customers desire customer-unique value but do not want to be too involved in the decision-making process. Such is the case with the environmental architecture surrounding CEMEX's GINCO system. Construction companies have little interest in participating in moment-to-moment dispatching decisions. CEMEX uses its design tool to respond with exactly the right combination of trucks for each site need without intruding on their customer's businesses. Progressive also keeps to itself the proprietary Progressive Automated Claims Management System (dubbed PACMAN), which includes a design tool for claims adjusting. By not bothering their often agitated, dazed, or just plain embarrassed members with the details, claims adjusters turn the normally loathsome interaction into an appreciated experience. And no one needs to get involved in specifying how FedEx gets a package from point A to point B—although FedEx nicely lets them track it online; shippers just need to know it gets there on time, every time.
For these companies, Mass Customization presents a new stage on which to introduce experiential value to their customers. They identified the inadequacies of existing mass produced goods and services, distinguished the individual characteristics of their customer bases, developed a modular architecture to efficiently serve their customers uniquely, and, finally, created an environmental architecture that used customization as the means to shift up the Progression of Economic Value. As a result, they now go beyond goods and services to offer what customers truly want.
And make no mistake: individuals more and more want their offerings individualized to them. Think of how we all customize our personal technologies—MP3 players, mobile phones, tablets, computers—to our personal taste. Apple, especially, excels at enabling people to customize each one of these devices to an extraordinary extent. After people create their own playlists, address lists, apps, software, and so forth, every device becomes its own unique artifact (and treasured possession). Particularly those now growing up, for whom such technology is almost second nature, would never give up this ability to make their devices their own—and increasingly will come to demand exactly what they want, across offerings, companies, and industries.
What Do Customers Want?
Most companies still resist mass customizing their offerings. Instead, they “manage the supply chain” by placing increasing 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 an increasingly unwieldy number of potential demands. These practices offer a surefire way to add costs and complexity to operations.
Worse, customers must sort through numerous alternatives to find one that even approximates what they want. Increased variety may enable a few additional buyers to find a good or service that very closely matches their desires, but only at the expense of increased time sorting through alternatives—not an insignificant consideration given, for instance, the fifty thousand or more stock-keeping units, or SKUs, in the typical supermarket. The vast majority of buyers, however, still fail to find an exact match. It all amounts to one bad experience after another.
Producing more and more variety in anticipation of potential, yet uncertain, demand often represents a last-ditch attempt to preserve the Mass Production mindset in the face of rapidly fragmenting markets. But variety is not the same as customization.5 Variety means producing and distributing product choices to outlets in the hope that some customer will come along and buy them. Customization, on the other hand, means producing in response to a particular customer's desires. As a result, businesses often overwhelm customers with so much product proliferation that they throw up their hands and walk away rather than go through a lengthy decision-making process with little or no support. Fundamentally, customers do not want choice; they just want exactly what they want. A mass customizer's designed interaction with each individual provides the means for efficient, effective, and (as much as possible) effortless determination of customer needs. To shift up the Progression of Economic Value, whether from goods to services or services to experiences, companies should use such interactions to figure out exactly what their customers want.
They must then bring that information about a customer's desires directly into operations for efficient, on-demand production or provisioning, effectively turning the old supply chain into a demand chain. Remember that mass customizing doesn't mean being everything to everybody; rather, it is doing only and exactly what each customer wants, when he wants it. Although a significant up-front investment may be required to develop the products, processes, people, and technologies required, mass customized offerings may ultimately cost nearly the same as mass produced ones, and sometimes less.
Take The Hertz Corporation's #1 Club Gold Program as a case in point. The Gold customer, who is told the program costs $60 a year, with the fee often waived, receives the same basic vehicle as everyone else but bypasses the line at the counter and need only give his name to the shuttle bus driver. He's then dropped off at the canopied Gold area, where he sees his name in lights on a large screen that directs him to the exact location of his car. When the customer arrives at his car, he finds his name in lights above it and again noticeably printed on the personal agreement hanging from the mirror, and, when the weather demands it (and local laws permit it), the car's engine running with the heater or air conditioner turned on. By not doing anything until the customer steps on the bus and gives his name, and then doing only and exactly what each customer requires on demand, Hertz discovered that its Gold experience actually costs less to provide than its standard service. That's why it often waives the $60-a-year membership fee, a practice that in our view is a mistake. Companies should charge for the value they add and not the costs they incur. Moreover, that money could be used to make Hertz Gold a still richer rental car experience.
Of course, determining what sort of customization would be worth a premium price is no easy task. Which features or benefits of the offering should be customized, and which left standard (such as the car, in Hertz's case)? Where in the value chain would buyers most prize customization? What key leverage points would provide the biggest bang for the buck? And what modular and environmental architectures would be most effective in creating memorable events?
To answer such questions, many companies turn to customer satisfaction, or “voice of the customer,” surveys that use market research techniques to gather data. Such information provides a great foundation for understanding the general needs of one's customer base. However, these techniques do not go far enough to determine what and where a company should mass customize. After all, customer satisfaction really measures market, and not individual customer, satisfaction. Few managers bother to scrutinize the individual results. They just view a few “CustSat” numbers that supposedly represent various market segments. They design surveys to ease tabulation, and not to gain true insight into customer-specific wants and needs, and all the customers who bother to fill one out know that they will gain no direct benefit.
Further, rarely do customer satisfaction surveys even ask for information about the particular needs and wants of individual customers. Rather, they invariably ask buyers to rate how well the company or its
personnel performed on a series of predefined categories. Managers gain precious little insight into what buyers truly want and need, as evidenced by what seems to be the most common theme of such surveys: how are we doing? What we are doing is inundating customers with incessant surveys that have little impact on what customers truly need. One airline questionnaire of this ilk even had a headline, incredibly, asking travelers to “Help Us Reinvent Our Airline”—an act that either overstates the impact of such generic customer input or underestimates the nature of corporate reinvention.
A More Memorable Measure
As Dave Power III of J. D. Power & Associates says, “When we measure satisfaction what we're really measuring is the difference between what a customer expects and what the customer perceives he gets.”6 In other words,
Customer satisfaction measurements essentially focus on understanding and managing customer expectations of what companies already do rather than truly ascertaining what customers really want. While such measurements have their place, companies must do more than merely measure against perception to mass customize effectively. They must understand the nature of customer sacrifice—the gap between what a customer settles for and what he wants exactly:
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