Managing Relationships on the Internet

Losing Control

Do you worry about the web? If you don't, maybe you should. Because the web is taking away some of your control over your business, and giving it to your customers.

Customers shopping for cars today can't be taken in by the usual car sales theater - they know exactly how much the dealer paid for the car. Five years ago, when the salesperson went to check with the manager, who offered a "special deal," customers had the uneasy feeling they were being manipulated - now the customers know the score.

As information sources proliferate, it gets harder and harder to get a customer to pay attention to your marketing messages. Unlike television, which people view passively; the internet is an interactive medium; your customer is in charge of the interaction, and has a trigger finger on the mouse.

Barriers to switching have fallen to the floor. To change suppliers a customer simply needs to type www.competitor.com.

Customers have more knowledge about prices and products, so they're harder to manipulate; customers will not sit still to listen to your marketing messages, and customers can take their business elsewhere with terrifying ease.

But change is seldom all good news or all bad news. Along with the change in control, the web also provides businesses with powerful new opportunities:

To attract customer attention by meeting their needs for information, entertainment, and community

To increase customer loyalty by providing better service

To collect an unprecedented amount of information about individual customer interactions and use this for profitable target marketing.

Managing Customer Relationships

How do you manage your web business when you've lost control over the customer interaction? The secret is to manage the relationship with your customers. You can use what you know about your customers to attract customers, to keep from driving them away, and offer them increasing value over time. You can use your increased ability to gather information to maximize -- and to measure -- the value of your customer relationships.

It's that simple. It's also difficult, because it involves doing business in a different way.

You need to compete by offering convenience and holding your customers' attention - not simply by offering good prices.

The best way to serve the customer changes over time. You need to keep track of the stage of your relationship with each customer, and optimize your interactions for each stage of customer lifecycle.

Managing customer relationships based on the "customer lifecycle" is not just a good idea, it is also a precise method of measuring success. Instead of measuring success by the profitability of your product lines, you measure success in terms of the lifetime profitability of each customer.

These are the basic ingredients of managing a successful web business. Let’s examine them in more detail.

The Mechanics of Customer Relationships

Convenience, attention, and content

Because customer attention has become such a scarce resource, it is critical that your web site is easy to use and contains relevant, useful information.

The web site needs to provide easy navigation for customers who are coming to you with different levels of experience and different goals. The same site must serve novices and long-term customers; people who are browsing for a future purchase, people who are looking to make a quick purchase, and people who are desperately seeking customer service. Building in ease of use is an iterative process: you need to continually test the effectiveness of your web site in meeting the multiple needs of your different customers; and improve usability based on what you learn. This attention to ease of use and to your customers' process will provide your customers with a good online experience - which is the heart of your company's image and reputation online.

In order to hold your customer's attention, it is important to consider why the customer is coming to your site, and then to provide information that is relevant to that purpose. The goal is to keep the customers coming back. Travel sites like Preview Travel hold customer attention over time with information about tourist attractions and special events, book and music sites contain reviews, financial web sites like E*Trade and Intuit's Quicken.com contain research reports and financial advice. Thinking about what the customer wants to pay attention to often leads to broader business offerings. For example, travelers are often interested in finding out about entertainment at their destination; this might lead a travel site to provide sports or theater tickets.

To provide ease of use, a good online experience, and compelling content, it is imperative to manage your web site's content. You need technology and processes that enable you to provide easy and flexible navigation, to continuously improve your site to meet the needs of your customers and grow your business, and to bring in fresh content that is compelling to your customers. This is not just a publishing process, it is a business process. Your customer's attention is key to establishing and keeping the relationship. By analyzing and understanding your customers' interests and processes, you will gain important clues to how to build your business online.

Lifecycle and intelligent personalization

Once you have the user's attention, how do you turn that attention into purchases and loyalty? Use the customer data at your disposal to conduct target marketing and offer personalized service. This is how you can get more money from your customers and compensate for price pressures.

The web allows you provide personalized service and to conduct targeted marketing more cost-effectively than any other medium. You can gather user data, and generate personalized services and promotions at almost no incremental cost.

Personalization is a valuable technique -- but it needs to be used in ways that are appropriate to the different stages of the customer lifecycle. Intelligent and gracious use of personalization can help you provide better customer service, engender more customer loyalty, and generate more revenue per customer. But clumsy use of personalization can drive your customers away.

Some web sites make the mistake of asking new customers for personal information before they can access the site's content. Customers don't want to be interrogated before they enter a store in a mall, and the same goes for the world wide web. Imagine a clothing store that asked your age and weight before you could shop for slacks. Columnist Jesse Berst calls this approach "the bouncer strategy." It is important that a customer’s first experiences of a web site are friendly. Customers need to trust you before they provide personal information. And surveys show that if customers don't trust a web business, they fill out forms with false data.

Personalization is sometimes discussed as if it were the ultimate goal of web communication. The ideal web newspaper is the "Daily Me," consisting exclusively of articles about collecting antique watches and updates on the marital status of Julia Roberts. But people don't always want to live in their own little room - seeing only the information they asked for. Customers often want shared context, and community - as well as the ability to view personalized information. Customers read The Wall Street Journal because they trust the perspective and context created by the news editors, not just because they can track personal investments and create a personal page with selected stories.

Personalization is not one thing, but is a collection of approaches to the customer. Each personalization technique has benefits that are useful for particular business goals and at different stages of the customer relationship.

With a new customer, it is useful to be able to adjust the content based on what the user is looking at or searching for. In this way, the web business can provide the user with relevant information, without knowing any specific information about the customer's identity.

Collaborative filtering technology can be useful when you have a few pieces of information, based on the customer's behavior. For example, Amazon.com uses collaborative filtering to generate book recommendations, based on a customer's previous book purchases. Amazon doesn't need to ask the user any personal questions in order to generate these recommendations.

Rules-based personalization, which takes actions based on the customers' behavior and stated preferences, can be extremely valuable in retail merchandising to help cross-sell and up-sell products. For example, a person purchasing hiking boots at LL. Bean's web site could be offered a discount on a pair of socks.

Personalization is a powerful and valuable tool. But some of the evangelism about one-to-one marketing can be misleading. Personalization is a technique, not an end in itself. The goal is good customer service and increased customer loyalty. Sometimes you can achieve those goals through personalization, sometimes through creating interesting and relevant context, and sometimes through creating or enabling user communities.

Measuring Success

The ultimate goal is profit - and it turns out that you can directly measure the relationship between customer loyalty over time and your bottom line. But this requires new ways of keeping track of your business activity and measuring success.

Success is measured by the lifetime value of each customer, not by product line.

Success is measured in terms of share of each customer's purchases, not just in "market share."

Lifetime Value of Customer

It is possible - and on the web, increasingly feasible - to measure the lifetime value of a customer - the profit that your company makes over the lifetime of the customer relationship. This calculation has two main components.

The lifetime cost of the customer, including acquisition cost, operating expense, and customer service

The sum of the expected lifetime revenues of a customer

This model focuses your attention on the value of keeping customers over time, and the role that service plays in creating profitable, loyal customers.

Maximizing the "lifetime value" equation requires maximizing the rate of new customer acquisition, the conversion rate of new visitors to buyers, and the repeat frequency of existing buyers. Focus on the metrics gives you new ways to evaluate the performance of your web business.

The costs of acquiring new customers are substantial. This means that existing customers are responsible for near term profits, and new customers will only contribute in the future. It is not economical to build your business only on first time buyers -- a continued customer relationship is critical to short and long term profits.

In a traditional model, profit is measured by balancing the revenues from the sale of a product against the costs of making, selling, and servicing the product. In this model, customer service is a cost to be minimized. By contrast, using the "lifetime value" model, it is possible to weigh the value of customer service against lifetime value of customer. It is often worthwhile to provide additional services that maximize the customer's value over time.

Customer Share vs. Market Share

An important strategy to maximize the lifetime value of your customers is to increase "customer share" - to meet more of the related and ongoing needs of your customers. Following this strategy, you build your business by extracting more from each customer, rather than a little from many customers.

This strategy is different from the traditional focus on market share. In the age of mass production and mass marketing, market share was a critical metric in determining success in the marketplace. The market share ware is a zero-sum game - winning the war allows a business to mass-produce and distribute goods at the lowest cost, and to amortize the costs of mass-marketing against largest number of customers.

Managing your business online requires you to consider both market share and customer share metrics as the cornerstones for determining success.

In a web business, market share remains important in the customer acquisition phase of the lifecycle - each new customer you acquire is one fewer for your competitor. In the customer retention share of the lifecycle, however, customer share becomes the key strategy.

Amazon.com is an example of a web-centric business model that embraces the notion of a customer lifecycle, market share, and customer share as critical elements of their business model. They have built a $100M business, becoming the worlds largest bookstore and taking customers away from Barnes and Noble and others. Now that Amazon has a worldwide following of regular customers, the company is beginning to sell music CD's to meet the related interests of its customers. Amazon realizes that it may not in fact be in the bookstore business, but is in the business of serving more of the needs of its current customers.

The Big Picture

Though these changes may be scary, different, and difficult, you can ignore them only at your peril. It is important to take a step back and realize what these changes mean in historical context. The internet is transforming the relationship between businesses and their customers, and it is transforming the way that businesses are organized and managed.

In the years since the industrial revolution, the relationship between businesses and customers has gone through two main stages. Mass marketing succeeded by creating broad demand for mass-produced products through mass advertising, which created positive emotional resonance and broad appeal for soap, cars, and breakfast cereal. Over the last several decades, target marketing has succeeded by identifying and meeting the needs of smaller segments of the population. Target marketers have learned to analyze and manipulate the hot buttons of specific groups of customers. Both of these approaches assume that marketers have control over their customers' attention and have the upper hand in understanding and controlling pricing.

On the web, customers have more information and control than ever before. But marketers are able to compensate and profit by leveraging customer information, and by managing their relationships with their customers over the life cycle of that customer relationship.

The way that business are managed and organized is also changing fundamentally. Since late 1800s, corporations have been organized by product line and by functional division:

Costs and revenues are measured by product line; allowing business to measure their level of success at lowering costs, improving productivity, and increasing sales for each category of product

The business is organized by functional divisions - research and development, production, sales, marketing.

The main assets are inventory and equipment

The goal is to maximize return on mass production and mass marketing expenses by maximizing market share

On the web, the business needs to be organized and managed in a fundamentally different way.

The main assets are not inventory or production equipment; the assets are the customer data and customer relationships

Profits are measured by customer, not by product line. The key metric is the lifetime value of the customer.

The goal is to maximize share of customer, as well as market share

The result of all of these changes will be the creation of value and wealth by profitably adding service back to the business equation.

Before the industrial revolution, many products were custom-made, and all marketing was personal. Food, clothing, furniture were produced on a custom basis, either by a family member, or, for the wealthy, by a servant or hired craftsperson. The local shopkeeper knew which foods and other items a household liked, and would make recommendations based each customer's preference. Storekeepers dealt with a small number of customers, and kept the information about their customers' desires in their heads.

Of course, before the industrial revolution, many fewer people could afford more than the bare necessities. With the advent of mass production and modern mass retailing, more people could afford small luxuries, but the personal touch was gone. The web has the potential to bring back a more personal approach - in a way that is still profitable.

Customers will quickly learn to expect new levels of personalized service - their expectations will change permanently, and it won't be enough to do business the old way. These changes that we are describing are long-term, deep, and permanent - you can't just ignore them and hope they will go away.

Conclusion and Recommendations

Just putting a catalog on the web and letting your customers shop online is not enough to create a successful web business. In the short term, this may reduce your transaction costs; in the long term, this will lead to reduced prices and reduced margins. The techniques of relationship management can give your businesses many new ways to compete, to add service and value, and to create growth.

Relationship management involves more than the web, of course. It involves other phases of customer interaction; in stores, over the phone, by mail. But relationship management is absolutely imperative to success on the web. It is therefore the place where many businesses begin as they develop their customer relationship strategies.

For the next three to five years, until high-bandwidth services are common enough to allow the widespread use of voice and video online, the core of the web will be text and graphics. The tools to attract customer attention and to build on-line relationships are, therefore, content technologies: content management, text-based customization and personalization, and text-centric collaboration.

It is important to use personalization intelligently - as a technique to build customer loyalty and drive revenue. If you view a single personalization approach as the goal of your web business, you will miss opportunities to create value in other ways, and you may risk alienating customers.

It is important to manage your web business using the appropriate metrics: lifetime value of customer, and share of customer, rather than just market share.

Customer data is a key asset in your online business - it will be critical to collect, track and measure customer interactions. Customer data is key to driving personalization and measuring success by value and share of customer.

Implementing these strategies is not quick and easy. If you attempt to do all of these things at once, you will probably fail. Some things are not possible with today's technology. Even the most successful web businesses today, Cisco, Dell, and Amazon, are only scratching the surface of what can be done. In order to succeed and grow your web business, you need to be flexible, in your strategy and in your technology, and prepare for continuing change and improvement in the coming years.

The changes catalyzed by the internet are deep and permanent. Though the change is painful, you can't stay on the sidelines. You need to move now or be left in the dust.