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Which Came First:
The Web or the Business Model?

Don Peppers and Martha Rogers, Ph.D.
Peppers and Rogers Group

See also:
Electronic Commerce (eCommerce)

          Businesses today, more than ever before, are searching for strategies that will enable them to cement customer loyalty and protect margins. In the aggregate-market universe, the universe of standardized products and mass marketing, the most widely understood and heavily practiced form of competition is centered around customer acquisition -- not customer retention. Of course, the more each competitor is focused on acquiring its rivals' customers, the more difficult issues of customer retention and unit margin become.

Ironically, as more and more firms evaluate how to use the new technology of the World Wide Web, they are finding that it is an ideal tool for aiding them in creating customer loyalty. Moreover, the technology is so different, relative to other marketing innovations, that some businesses are actually "discovering" that customer retention is an important and achievable business objective! But to achieve the objective, a different kind of business model must be embraced -- a model of 1to1 marketing, as opposed to traditional mass marketing.

          The truth is, it is very hard to tell which is the more important factor in pushing companies toward 1to1 marketing -- the increasing difficulties and lower returns from the traditional, aggregate-market business model, or the powerful new interactive capabilities of Web technology.

          There is a widely disseminated contrarian view today that the Web is over-hyped or that it will eventually crater under its own "wait" and people will simply give up on it. Nothing could be farther from the truth. If anything, there's too much skepticism today about the Internet and about information technology in general, not too little.

          The Internet's "Killer App," from a mass market standpoint, turns out not to be online shopping, or news and information, or even entertainment and games. It is interpersonal communication. Email. Because of email the Internet has now reached the Critical Mass stage where no amount of nay-saying will ever derail its continued -- explosive -- expansion.

          Imagine trying to get motorists to give up their cars in the early part of this century, after the Model T had already been sold to a few hundred thousand families. "Stop! Turn back! These cars are so difficult to drive that only mechanics, well off motor buffs, and other geeks will ever take the time to learn how. And the roads are awful! If people don't stop buying and driving more and more cars, the road system will simply break down!"

          The flaw in these contrarian arguments is that the explosion is already underway, and nothing will stop it now. Technology will find a way, because now the demand exists for it. The cars will get easier and easier for ordinary people to drive. The road system will be improved. Genuine interstates are on the way. It's inevitable.

          However, email was just the detonator for the explosion.

Increasing the Cost-Efficiency of Individual Interaction

          The real power of the Internet and the World Wide Web, and we are only just glimpsing it now, is that commercial enterprises can interact with their customers, suppliers, and employees in a dramatically more cost-efficient way -- an improvement in cost-efficiency of several orders of magnitude. The Internet is practically eliminating the "friction" in business transactions caused by the slow, relatively expensive process of communication among business units, or between companies and their suppliers, partners, and customers. Over the last two decades we have become more and more efficient at managing communication, with the touch-tone phone, voicemail, conference calls, facsimile machines, pagers, and cell phones. But in just its first two or three years the World Wide Web has done more to reduce the cost of communication and interactivity than all these technologies combined.

          Think about how the fully allocated cost of the most sophisticated calling center interaction with a customer compares to the virtually cost-free interaction with the same customer via the Internet. Fruit of the Loom estimates that every time a distributor uses its extranet, Activewear Online, to place an order, rather than calling in to a human operator, the distributor saves $10 to $20.

          Moreover, this improvement in cost-efficiency produces benefits both for the enterprise itself and for its customers, suppliers, and employees -- those on the other side of the interaction who no longer have to specify and re-specify, explain and re-explain. Whether it's a customer signing on to the e-Schwab site and getting a perfect picture of his current stock portfolio, or a shopper entering an online mall in which the stores have been automatically re-arranged to suit her own personal tastes, based on her past purchases, the Web allows an enterprise to remember its last interaction with each party, individually. This has the potential to make it easier and easier for the customer, or the employee, or the supplier, to interact again and again. With every interaction, the amount of "friction" could be reduced -- if the Web site operator takes the right approach to managing the interaction.

Doing Business Faster, But Not Necessarily Better

          Nearly any business can gain some kind of advantage by using the Internet and the World Wide Web today, if only to pass information to and from customers and employees in a more efficient manner. To the extent that a business does that, it is fundamentally just accelerating its current business practices.

          But if this technology is used simply to speed things up -- if it never changes the nature of the actual work done -- then it can easily result in a backlash. Think back to when email was first introduced in your own business, and you will probably remember the sensation you felt one day when you realized that the velocity of life at your business had increased. After just a few months, however, you may also have noted that the volume of new information you and your employees needed to sort through each day had also increased. In fact, it may have increased so dramatically -- 50 or even 150 email messages per day for a senior or mid-level executive -- that you might now have doubts about the real benefit of email in the first place.

          Similarly, companies are putting up Web sites so their customers can get better and faster access to information on products and services offered. But often what happens is that even a moderate volume of incoming communications from customers is enough to overwhelm a company's ability to deal with it, especially in the consumer marketing arena. So where is the nirvana that has been promised? Where is the real pay-off from interactivity?

          The ultimate business benefit of interactivity and the World Wide Web will not come simply because businesses work faster. It will come because businesses work differently.

Changing the Business Model

          To take maximum advantage of the cost-efficiency benefits offered by the Web, an enterprise must be willing to alter its actual business model. It must move away from aggregate-market, one-size-fits-all competition, and toward customized, relationship marketing -- one-to-one (1to1) marketing.

          One-to-one marketing can be thought of quite simply as "treating different customers differently" -- that is, telling them apart and remembering them individually, interacting with them, and then customizing the product or service to each customer's own, individual needs. This implies three distinct computer capabilities -- the database, interactivity, and mass customization.

          When these three capabilities are used together, the firm can keep track of its customer individually and remember him or her. The customer can interact with the firm and say what he wants, or how he wants to be served. And then the firm mass customizes its product or service, in order to meet these needs. At this point yet another interaction takes place, and the customer tells the firm how to better adjust the service or better fit the product. Over time, as the customer teaches the firm how he wants to be served, and the firm incorporates this knowledge into its actual behavior toward that customer, a "Learning Relationship" is created. It is this relationship that ensures the customer's continued loyalty and protects the firm's unit margins.

          A Learning Relationship is a relationship with a customer that gets "smarter" with every interaction. If every time you interact with a customer you can tailor your service or product a little bit better, based on what the customer told you the last time, then after a while you will have set up a barrier to competition that will be nearly insurmountable. After all, even if your competitor offers the same exact quality of product and the same level of customization as you do, if your customer wants an equivalent product he must first re-teach the competitor what he has already gone to the trouble of teaching you.

          Not only will a Learning Relationship make a customer inherently more loyal, but it will tend to protect a firm's margins as well. The single biggest threat to unit margins at most businesses today is the "commoditization" that comes from competitive marketing. Other firms imitate your product or service, offering the same features and benefits to the market, and rendering your product less unique. In such a market, prices fall as competitors scramble to build and protect their own share.

          But by using individual customer input to tailor a product or service -- or just to tailor some aspect of the product-service "bundle" -- an enterprise can escape the trap of commoditization and protect its margins. A custom product, driven by individualized interaction, is inherently unique. Moreover, if every time you interact with a customer your product can be better tailored to that customer's needs, then with every interaction the product you render will become more convenient, and therefore more valuable, to that customer.


The One to One Future Enterprise One to One Don Peppers and Martha Rogers, Ph.D. co-authored Enterprise One to One: Tools for Competing in the Interactive Age (Currency/Doubleday, 1997) and the international best seller, The One to One Future: Building Relationships One Customer at a Time (Currency/Doubleday, 1993). Together they founded Marketing1to1/Peppers and Rogers Group, a management consulting firm in Stamford, CT.

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