Connected Strategy

by Nicolaj Siggelkow

  Many software companies, such as Salesforce and IBM, also fall into the category of connected producer. Their tighter connection with their clients allows them to customize their offerings and anticipate future needs (e.g., with respect to cybersecurity). Likewise, Google, with its search engine, Gmail, and Google Photos, is a connected producer. The fact that Google does not charge for these products does not detract from its status as a connected producer who has established its own ecosystem of services. (We will return to the revenue model of Google and similar firms in chapter 8.)

  Finally, consider the example of Disney’s MagicBand, which we discussed in chapter 1. The band incorporates respond-to-desire elements by enabling easy access to hotel rooms and rides and easy payment for merchandise and food. Through its app, Disney incorporates elements of curated offering with suggestions, and it engages in coach behavior by redirecting visitors to less crowded rides. Not surprisingly, other entertainment firms are developing similar technologies. For instance, Carnival, the largest cruise line operator in the world, has developed a device called an Ocean Medallion that can be carried in a pocket or worn as a pin. This medallion, just the size of a quarter, automatically opens the door of the passenger’s stateroom (no need to tap a sensor), makes it faster and easier to embark and disembark, and facilitates payment for items purchased on board. Linked to an app, it can help family members find one another on expansive ships. The app can be used to order food for delivery wherever the passenger plans to eat. Servers know who ordered the food because the passenger’s photograph appears on their handheld device when they get close to the passenger’s medallion. Passengers can upload their preferences before boarding, which enables Carnival to offer tailored activities. Carnival and Disney are both using a connected producer architecture. The connection is between the customer and the firm; it just has become a very high-bandwidth connection.

  Connected Retailers

  Connected producers face competition not only from other connected producers but also from firms implementing different connection architectures. For instance, in the realm of investment advice, companies like Wealthfront and Betterment mainly use algorithms to assemble a customized portfolio for each investor that comprises exchange-traded funds or low-cost mutual funds managed by others. We call these firms connected retailers—firms whose main role is to showcase, curate, and deliver products from suppliers to customers. Connected retailers receive information from customers and then create a connection between suppliers and customers. This connection runs through the connected retailer, as the firm is actively involved in moving the product from the supplier to the customer (figure 7-2).

  FIGURE 7-2

  Connection architecture for a connected retailer

  Like connected producers, connected retailers can focus on one connected customer experience or on a range. For instance, Wealthfront and Betterment make creating a customized investment portfolio quick and easy by doing everything online (respond-to-desire); they provide a curated offering by allowing customers to state various investment goals and then customizing a portfolio that aggregates over those goals; and they have an automatic execution experience through services like automated loss harvesting.

  Amazon’s practice of shipping out of its own warehouses is perhaps the most well-known example of a connected retailer. Customers interact with the company mainly through a respond-to-desire connection. However, Amazon has clearly increased curated offerings through “customers like you purchased” recommendations and automated offerings, such as subscription programs where customers periodically receive products like toothpaste or detergent.

  Many connected retailers create customer value through a curated offering customer experience. While the internet has given customers access to practically every product and service available worldwide, such choice is overwhelming and requires a lot of customer time to make good decisions. Therefore, curation can create a lot of value. Connected retailers offering subscriptions to curated boxes of merchandise have sprung up across hundreds of product categories, from food to cosmetics to pet supplies. Just a sampling of subscription services starting with the letter B is illustrative. From Bad Ass Mom Box (jewelry and beauty products) to BarkBox (dog toys and treats) to Busy Bee Stationery (stationery), all of them have the same user experience and the same connection architecture. Firms purchase items from their suppliers and assemble them as a curated offering tailored to each customer.

  We have already mentioned curated meal subscription box retailers such as Blue Apron and HelloFresh. Several other players have emerged in this space as well, trying to differentiate themselves by focusing on particular cuisines or preparation time. Competitors include Purple Carrot (vegan), PeachDish (Southern cuisine), Sun Basket (paleo and gluten-free), Green Chef (certified organic), and Gobble (preparation time of ten minutes using only one pan).

  Like some connected producers who coordinate customers to utilize resources more efficiently, several connected retailers have a similar business model. Car-sharing services like Zipcar (now owned by the Avis Budget Group) fall into this category. Unlike car2go, which is operated by the firm that manufactures the shared cars, Zipcar buys or leases cars from various manufacturers, providing broader choice. (For another example from the mobility industry, see the sidebar.)

  Rent the Runway has a similar business model for a very different product category: designer dresses. Because these dresses are expensive and often worn only once, they are a great example of underutilized resources. With Rent the Runway, women can rent dresses for four or eight days at a price much lower than that of purchasing them. Each rental arrives in two sizes, ensuring the dress will fit. Customers return them via UPS, and Rent the Runway handles the dry cleaning.

  Both Rent the Runway and Zipcar are exploiting an important customer trend. What many customers actually desire is access to a product or service, not necessarily ownership. Especially when needs vary over time (today I’d like to drive a convertible; yesterday, I needed a pickup truck; and tomorrow I need a minivan) and the assets are very expensive, it has been traditionally very difficult for a customer to match needs with solutions (and the outcome is usually a compromise like a family sedan). Connected retailers who rent, rather than sell, products allow customers to achieve a better match between their needs and solutions at an affordable price. One might refer to these cases also as instances of the sharing economy, but from the perspective of a firm that has to build a connected delivery model, we find it more useful to classify them as connected retailers.

  It is interesting to note that some firms that started out being connected retailers, such as Netflix, Amazon, and Zalando, have used their customer data to enter into the production of movies and private-label items and have become connected producers as well. Their direct connection to the end customer provided these firms with deeper knowledge about customers than any of their suppliers possessed, allowing the firms to successfully backward integrate. In sum, to create a connected strategy, firms can employ more than one connection architecture.

  E-SCOOTER AND BATTERY SHARING

  Mobility in cities has been changed not only by ride-hailing services but also by a range of bike and scooter rental options (both electric kick scooters and motorized scooters). Consider Coup, an electric (motorized) scooter rental company operating in Berlin and Paris, and owned by Robert Bosch, a German engineering and electronics company that is one of the world’s largest manufacturers of automobile components. Customers can rent an e-scooter (including a helmet) using Coup’s app. The scooters are GPS equipped, so they can be picked up and left anywhere within the city limits. Payment is automatic and based on usage time. One common issue with such sharing services is that scooters end up in places where they aren’t needed, such as in front of bars on Sunday mornings. Coup has crowdsourced the solution to this problem. It offers free riding time to volunteers who are willing to move the inventory of bikes to desired locations. Interestingly, the e-scooters used by Co
up do not have any Bosch parts in them. In order to move faster in this space, Bosch decided to use a scooter produced by Gogoro, a Taiwanese manufacturer, in essence making itself into a connected retailer like Zipcar. Gogoro, in turn, pursues a connected producer strategy in Taiwan. It sells, rather than rents, its scooters there with a monthly subscription fee that allows riders to change batteries at swapping stations located throughout Taipei. Riders can find the stations and reserve their batteries through an app. Gogoro believes customers do not want to share their scooters, but they are willing to share their batteries. When charging its batteries at the stations, Gogoro can take advantage of low electricity prices at times of low electricity demand.

  Connected Market Makers

  While Wealthfront and Betterment are actively involved in assembling and managing their clients’ portfolios, other firms have roles primarily in establishing a connection directly between a customer and a supplier. For instance, LendingTree is an online lending exchange that connects customers with multiple lenders that compete for business, allowing the customer to select the best supplier for his or her needs. We call these firms connected market makers—firms that create a direct link between supplier firms and customers but that aren’t involved in handling the product or service. Connected market makers control the connection from the customer to the supplier, but they do not own what flows back from suppliers to customers. Connected market makers thus rely on existing suppliers to fulfill the needs of customers.

  This is illustrated in figure 7-3. Note that unlike the connected retailer, who gets directly involved in handling the product, a connected market maker establishes the connection and potentially vets the suppliers but is otherwise hands-off in how the supplier fulfills the need, thereby carrying neither inventory nor financial risk. Also, the number of suppliers that can be connected to customers can be very large, since the connected market maker is not responsible for holding inventory or directly managing the stream of goods and services from the suppliers to the customers.

  Wallaby Financial is another example of a connected market maker in financial services. If a customer stores all of her credit and loyalty cards on its platform, Wallaby’s app will recommend the optimal card for each purchase based on the nature of the purchase and the attributes of the cards in her mobile wallet. Thus, the company can manage the customer’s cards to minimize fees paid while maximizing rewards and discounts. Using this data, Wallaby recommends new credit cards for more savings. In this case, Wallaby creates new connections between credit card issuers and customers, earning a referral commission.

  FIGURE 7-3

  Connection architecture for a connected market maker

  The distinction between connected retailer and connected market maker is subtle but important. By focusing entirely on connecting businesses and customers (without purchasing products or capacity), connected market makers are less capital intensive. Consider Amazon again. As a connected retailer, it invests in warehouses and inventory. But with products that are sold through Amazon Marketplace, the company acts as a connected market maker by taking the customer order and redirecting it to the seller, who then takes care of the order.

  Expedia and Priceline work similarly. They neither own airplanes nor commit to purchasing seats on flights or rooms in hotels. They simply find customers looking for air travel or accommodations and then connect them to the right airline or hotel. Connected market makers exist both in the B2C world and in the B2B world. For instance, IronPlanet is a connected market maker for used construction, transportation, and agricultural equipment, a market estimated to be worth around $300 billion. IronPlanet connects industrial buyers to industrial sellers of heavy equipment. (For another example of a connected market maker, see the sidebar.)

  So, if the market maker is entirely hands-off in the transaction, what value does it create? Wouldn’t it be better if the customer connected with the supplier directly? Market makers can fulfill two functions:

  They can provide curated offerings and, free from the need to make any investments in fulfillment, can do so on a bigger scale. For example, OpenTable can connect patrons looking for restaurant tables with pretty much any restaurant in the country, a level of choice and access that is impossible (or really, really inconvenient) for a customer to replicate.

  Market makers can ensure that the products and services on their platform are top quality and provided by reputable sellers. While the individual customer interacts with a business only once, the market maker does so repeatedly. The vetting can be done by the market maker itself, as in the case of Sweeten, a market maker that connects reputable contractors to customers with significant renovation projects, or through reputation scoring done by previous customers, as in the case of Angie’s List, a crowdsourced directory that has accumulated millions of reviews for all kinds of local businesses and that connects those businesses to customers.

  Given that initial entry costs for a connected market maker are relatively low, we have seen many start-ups using this connection architecture. The downside of low entry costs, of course, is that entry is easy for everyone. As a result, we have seen rampant imitation, leading to ever growing costs of attracting participants on both sides of the market. Market makers have to provide increasingly better incentives to suppliers to convince them to join, while at the same time customer acquisition costs are rapidly increasing. Google and Facebook have become the de facto new “landlords.” Market makers don’t pay the traditional rent for stores or warehouses, but they pay Google and Facebook and others for customer leads. Thus, as some industry observers have noted, customer acquisition costs have become the new rent.

  THE PANDORA OF THE ART WORLD

  The global market for art is more than $60 billion annually, yet it is very fragmented. Art is sold in auction houses and in thousands of art galleries around the world. This makes the market for art in the range of $50 to $100,000 very local and inefficient: art collectors buy what they find in galleries in their hometown but are usually unaware of what is available in other galleries. Artsy, a connected market maker, is changing this by connecting galleries and auction houses to art collectors around the world. More than eight hundred thousand pieces of art from more than two thousand galleries representing eighty thousand artists can now be found on Artsy. Such a huge catalog of art can be overwhelming. Artsy adds value not only by providing a marketplace but also by creating a curated offering customer experience. Similar to what Pandora did with music and Netflix with movies, Artsy has created a classification system (the Art Genome Project, inspired by Pandora’s Music Genome Project) that describes each piece of art along more than one thousand dimensions that Artsy calls “genes.” The dimensions include characteristics such as historical movements (e.g., contemporary Turkish art, pop art), subject matter (e.g., food, shadows), visual qualities (e.g., asymmetrical, blurred), medium and techniques (e.g., animation, collage), and materials (e.g., aluminum, gemstones). This classification system allows potential buyers to explore the space of available art in highly nonlinear yet related ways. For instance, a buyer who likes Andy Warhol, whose work, however, is outside the buyer’s budget range, could be guided to younger artists whose work shares some dimensions with Warhol’s and might be photographs rather than paintings.

  Crowd Orchestrators

  What are alternative sources of funding for a project like filming a documentary? For a loan, one option is Prosper. Borrowers request loans between $2,000 and $35,000, and individual investors invest as little as $25 in loans they select. Prosper handles the loan servicing on behalf of the matched borrowers and investors.

  Whereas connected market makers create a connection between customers and supplier firms (e.g., banks), Prosper connects customers to individuals who serve as suppliers (of funds in this case). Not only does Prosper rely on individuals to serve as suppliers, but Prosper was essential in creating this funding source—a crowd of individuals—in the first place. Prosper thus orchestrated a crowd: it cre
ated a new set of connections among previously unconnected individuals. Consequently, we call this connection architecture crowd orchestrator. Just as with connected market makers, here the firm focuses on creating connections instead of producing or handling products directly. This time, however, the connections are made between individuals and customers, not between existing firms and customers (figure 7-4).

  Kickstarter is another crowd orchestrator and fits the profile in figure 7-4. It connects individuals who want to support projects or want to pre-buy products that are still in the creation phase (like the documentary on polar bears). Though each individual contribution might be small, Kickstarter has collected in its first nine years over $4 billion in funds and supported over 154,000 projects, all of which happened without the involvement of a bank or venture capitalist. Kickstarter not only funds individual projects but is also quite often used to fund startups. Banks and other financial institutions now face competition from individuals banding together on these platforms. Where once banks might have counted on people financing creative projects with personal or high-interest credit card loans, some of this market has been taken by crowdfunding.

  FIGURE 7-4

  Connection architecture for a crowd orchestrator

  While both connected market makers and crowd orchestrators are similar in that they directly connect customers to suppliers, there are key differences between these connection architectures. A customer who transacts via a connected market maker would quite likely have made a similar, although possibly less optimal or convenient, transaction without the market maker: the customer still would have made a reservation at a restaurant (without OpenTable), booked a hotel room (without Priceline), or a bought a plane ticket (without Expedia). These transactions would have happened because the suppliers that connected market makers connect already existed. In contrast, a crowd orchestrator creates new supply by allowing individuals who otherwise would not have participated as suppliers to enter the marketplace. By creating connections between these individuals and customers, a crowd orchestrator is essentially creating a new market. Without Prosper, it is very unlikely that a borrower could find individuals who would give him twenty-five dollars each; without Airbnb, it is very unlikely that a traveler would have found an apartment to rent for a single night. (For other examples of crowd orchestrators, see the sidebar.)