How Companies Can Create Lasting Customer Relationships
- by Wharton Magazine
Read an excerpt from Connected Strategy, the upcoming book by Mack Institute Co-directors Nicolaj Siggelkow and Christian Terwiesch.
Connected Strategy, a new book by Mack Institute Co-directors Nicolaj Siggelkow and Christian Terwiesch, shows how companies can simultaneously improve both the customer experience and operational efficiency. The following excerpt explains the concept of connected strategy, its two key elements, and its four design dimensions. For more, the book will be available May 21 through the Wharton Digital Press bookstore.
A good way to start understanding connected strategy is to consider the traditional relationship between customers and companies. Traditional interactions start when customers realize they have an unmet need. This need could be the desire to see Mickey Mouse and ride a roller coaster, the dream of mastering financial accounting, or the urge to get into shape before summer arrives. Customers then figure out how they want to fulfill this need. They browse theme parks on Expedia, they look for accounting books at Barnes & Noble, or they consult with friends or the local gym on how to train for a triathlon.
At some point, customers attain a level of knowledge that sparks action to put some money on the table. They book a ticket to Disneyland, they buy an expensive textbook, or they sign up for a weeklong training camp. But there is considerable friction in the traditional transaction: customers spend a significant amount of effort to search, request, and receive the product or service they desire.
Firms sit on the other end of these traditional transactions. Yes, they can use marketing dollars to influence the customer along the journey to place an order, but they have limited connections to that customer. Their episodic interactions start only once the customer has placed an order, and they end on delivery of the product.
In traditional interactions, firms work hard to provide high-quality products and services as quickly as possible and at a competitive cost. They manage and perfect their marketing and operations within the model of episodic sales, but they are inherently limited by the lack of deep connections with their customers. Traditional episodic interactions between customers and firms usually require customers to invest significant effort in figuring out a solution to their needs, then requesting and receiving the product or service. Moreover, there often exists a gap between what the customer wants and what the firm provides. This gap can be a temporal gap (the customer must wait), or a gap between what the customer really wants and what the firm has to offer.
A firm that is able to move from episodic interactions with its customers to a connected relationship overcomes these shortfalls. Consider again the power of the MagicBand. Disney used to have only a handful of interactions with its visitors, and those happened at well-defined intervals—when they came to the park and bought a ticket, or when they ordered cheeseburgers at the restaurant. Now, sensors track the guests via their MagicBand every step and every second. The MagicBand not only reduces the effort in ordering and receiving cheeseburgers or souvenirs, it tailors the experience by making suggestions to the visitor.
Similarly, McGraw-Hill originally interacted with a reader only when selling a book, and even that connection was delegated to a retailer, similar to the case of Nike. But today, every time the reader looks at the book or tackles a practice problem, a connection is established that allows the publisher to learn about the reader, curate its offering, and coach the student when he or she is stuck. Meanwhile, in health care, the connected strategy moves the doctor-patient relationship from an episodic encounter every few months to a continuous flow of data from the patient to the care team, enabling medical needs to be addressed before they become severe.
Moving away from episodic interactions toward a connected relationship turns a theme park into a magical experience, transforms a book publisher into a creator of learning journeys, and revamps a hospital system into a proactive care organization. Such deeply connected relationships create more loyalty and higher profits.
Connected strategies don’t just happen; they need to be carefully designed. They have two key elements: a connected customer relationship and a connected delivery model. The connected customer relationship is what delights the customer. The connected delivery model is what allows the firm to create these relationships at low cost. Each connected customer relationship and delivery model is the result of strategic choices along several design dimensions. Let’s look at these in figure 1-1.
At the heart of the connected strategy is the connected relationship between customers and a firm. We find it helpful to think about four design dimensions of a connected customer relationship, which we will refer to as the four Rs of connected relationships. First, the information that flows from the customer to the firm allows either party to recognize a customer need. Once a need is recognized, the customer or firm identifies a product or service that would satisfy this need, leading to a request for a desired option. In turn, this triggers the firm to respond, creating a customized, low-friction customer experience. By interacting with customers frequently, a firm is able to repeat the interactions with its customers, allowing it to continually refine the cycle of recognize-request-respond and to convert episodic interactions into a true relationship with its customers.
To create connected customer relationships in a cost-efficient way, a firm needs to create a connected delivery model. The delivery model is the result of three key strategic decisions. First, the firm has to decide whom to connect with whom in its ecosystem. What connections need to be created between and among its suppliers, its customers, and itself? We call this the connection architecture. Second, the firm has to decide how money will flow through this architecture, allowing it to monetize the value that results from breaking the trade-off between customer happiness and efficiency: it has to design a revenue model. Lastly, the firm has to make a range of technological choices that facilitate all the elements of a connected strategy. It has to decide on its technology infrastructure.
This book is designed to help you both understand and create connected strategies for your own organization. We have structured the book into three parts. In part I, we show in detail how connected strategies allow you to break your existing trade-off between customer happiness and efficiency. Part II helps you understand how to build connected customer relationships. Finally, in part III, we describe how to build a connected delivery model. Each part concludes with a chapter we call a workshop. In these workshops, we offer exercises that have been tested and refined with executive education audiences. These workshops will help you assess your firm’s current activities and create your own connected strategy.
Reprinted with permission of Harvard Business Review Press, from Connected Strategy: Building Continuous Customer Relationships for Competitive Advantage (Harvard Business Review Press, May 21, 2019) by Nicolaj Siggelkow and Christian Terwiesch. Copyright 2019 by Harvard Business School Publishing Corporation. All rights reserved.
Editor’s note: This post was originally published by the William and Phyllis Mack Institute for Innovation Management as part of their Mack Institute News. View the original post here and to be notified when Connected Strategy publishes, sign up here.