The Internet has radically altered the
proposition that listening to your customers can help you improve your products
and services. Customers are now able to be so intimately involved in the
development and usage of what you have to sell that they can become co-creators
of value. But there are certain things you need to do to make this newly
enhanced relationship successful. By Ajit Kambil, G. Bruce Friesen and Arul
Sundaram Outlook Journal, June 1999
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PDF Help When Italian automaker Fiat wanted to test new design
concepts for its Punto, it invited potential customers to visit the Fiat Web
site and select from an array of features. More than 3,000 people participated.
As a result, Fiat was able to capture valuable insight into the likes and
dislikes of a targeted consumer group, test different design concepts at low
cost and design a car far more reflective of customer preferences. For their
part, customers got a car closer to what they actually wanted.
What Fiat has discovered is a new way to create value. It's
in good company: These days, Wall Street darlings like Amazon.com, America
Online, Cisco Systems, Dell, eBay, Yahoo! and other electronic commerce
innovators are partnering with their customers to co-create value and, indeed,
are capturing greater value than either party could have created independently.
Co-creation is also leading to a rebirth of customer loyalty, a fragile concept
in a world where customers are only a mouse click away from a better deal.
Co-creation adds a new dynamic to the producer/customer
relationship by engaging customers directly in the production or distribution
of value. Customers, in other words, can get involved at just about any stage
of the value chain. Some managers liken the transformation to turning customers
into "employees." Consequently, managers must learn new techniques to motivate
customers to co-create value as well as ways to successfully monitor and manage
the process along the way.
Co-creation is not unique to the electronic economy.
Examples can also be found in the traditional economy. Furniture retailer IKEA
sells at steeply discounted prices, profiting from co-creation by encouraging
customers to provide their own product transportation and assembly services.
Meanwhile, customers benefit from the lower costs.
However, better and cheaper communications and computing,
plus relentless competition to deliver greater value to customers, are
expanding the possibilities for co-creation in the eEconomy. New communications
devices and the Internet allow broad communities of interest to coalesce around
specific products and services. Microprocessors embedded in appliances make it
possible to adapt them to the needs of specific customers. And as goods and
services in which information is a key component become more valued,
customer-created content, knowledge and opinion become vital assets.
Loyal Fans
Consider how a few companies
are using co-creation to build value or customer loyalty. On the Cisco Systems
Web site, an online utility permits customers to reduce downstream installation
costs by co-creating features on the routers they purchase. Cisco Systems
generated 42 percent of its $3.8 billion in 1998 revenue in part through the
sale of such co-created products.
Red Hat, a company with investors like IBM and Dell, is
seeking to commercialize a co-created product-the Linux computer operating
system. Its creator, Linus Torvalds, first released Linux as free software on
the Internet in 1991. Since then, thousands of users and individual programmers
have enhanced the features of the operating system, creating a robust
cross-platform system estimated to run on more than 10 million company systems.
Despite its unconventional co-creation history and the fact
that Linux has no single owner, several companies like Red Hat are creating
valuable businesses providing technical support and applications for Linux.
IBM, Netscape and Corel have all created applications for this product. The
ongoing co-creation of Linux by thousands of loyal users has propelled it to
the point where it's considered a serious competitor to more established and
commercially distributed operating systems.
Cisco Systems and Red Hat each
have made choices to capture the value of co-creation at various stages of the
value chain. Why aren't more companies and customers co-creating value actively
in the emerging eEconomy? For one thing, it's not as easy as it looks. Cheaper
information exchange does not necessarily translate to co-created value unless
companies carefully manage the risks and create effective partnerships with
customers. Even innovators can trip up.
Take Amazon.com. The online bookseller has embraced
co-creation from its beginnings, encouraging readers to post their reviews for
others to read and building a retail community by offering a 3 percent
commission to customers whose Web sites direct sales to Amazon.com. However,
when it became known that Amazon.com was giving publisher-paid prominence to
specific books without clearly labeling them as such, it ran afoul of an
unwritten rule in co-creation: Don't sell co-created value to third parties
without advance notice to or the consent of your customers. As a result of the
criticism it received, the company quickly made clear which books were being
explicitly promoted through fees from publishers and offered refunds to
customers for any books they may have purchased under the old system. The
company publicly admitted that it received "expressions of concern" from
customers. By responding quickly, it seems to have reestablished customers'
trust in Amazon.com.
Clearly, involving customers directly in the creation of
value involves risks for both customer and producer. What can you do to manage
the risks? First, you need to understand what they are.
Privacy. Internet consumers are
increasingly concerned about privacy risks. Acknowledging this concern, IBM,
one of the largest advertisers on the Web, announced that it would no longer
advertise on sites that did not have explicit privacy policies.
Legal. Co-creation can create
potential legal risks for both customers and producers. This is especially true
of information or software companies that rely on customers for content. Both
companies and customers can unknowingly violate software copyrights or other
intellectual-property covenants or libel laws through the submission of content
to a company in the co-creation process.
Brand. Customers can just as easily
diminish value over the Internet as they can co-create it. As illustrated by
the Amazon.com example, they can develop highly specific expectations of
particular brands. Amazon.com's attempt to change its revenue model offended
many customers, who then mobilized to protest, putting the brand's reputation
temporarily at risk.
Again, no one said co-creation is easy. Companies and
customers also have to overcome a number of challenges to effectively co-create
value.
Goal Divergence. Customers and
producers traditionally bring opposing objectives to the marketplace; one hopes
to minimize cost, the other to maximize profit. This imparts a win-lose dynamic
to the relationship—what one loses, the other gains. Co-creation requires both
to rethink their relationship; each must be prepared to switch to a win-win
relationship instead. This means setting mutually defined shared goals and
learning to exchange often sensitive information.
Effort. Co-creation often requires
greater effort on the part of both customer and producer than a traditional
market interaction. People on both sides must think about what they want to get
out of a cooperative relationship. Reducing the cost and effort required will
greatly enhance the likelihood of success. For example, in the case of eBay,
the largest and most active auction site on the Web, the firm has created an
extremely easy-to-use service through which sellers can post information about
items up for auction and bidders can place or review postings about seller
reliability. eBay provides the technology for this bustling digital bazaar that
hosts more than 1.5 million auctions every 24 hours, while users write their
own listings, provide their own digital images and complete the exchange
process off-site.
For many participants, eBay has become a cost-effective
alternative to running an antiques shop or flea market booth as well as a form
of interactive entertainment, allowing users to auction off goods on a global
basis with far less cost and effort than required in the offline world.
However, as a form of entertainment, eBay requires concerted customer effort
and participation, while the producer must maintain and constantly improve the
systems technology.
Equity of Returns. Customers and
producers also can be expected to want equitable returns for different levels
of effort. In the case of information companies like America Online, where
value may be co-created through online discussions, there is a high potential
for free-riding. If contributors do not perceive an equitable reward for their
effort, they are likely to defect to other forums.
Fortunately, there are a number of ways companies and
customers can address these risks and challenges and build the trust to
effectively co-create.
Define Objectives. Before undertaking a
co-creation strategy, companies should clearly define their objectives and
determine how they want customers to affect the value chain. Fiat chose product
design; Amazon.com chose affiliate marketing with customers. For each step in
the value chain that involves customers, managers can set measurable
objectives—for example, the number of new ideas generated or product designs
tested for a given cost at Fiat, or the number of book sales through affiliates
at Amazon.com.
Select The Right Co-Creators. Not all
customers will be good co-creators. Investment firm Japonica Partners has a
forum on its Web site that is open only to institutional investors to discuss
research and analysis with one another. By limiting access, the firm ensures a
sophisticated level of communication. It can then take what it learns from the
discussions to make investment decisions—decisions that should be better for
its customers.
Thus, every Web-based enterprise must ask: Does the company
have the right customers with the right skills to affect specific elements of
the value chain? Improvements in targeting customers online by demographics,
psychographics, expertise or other variables are helping firms enhance
co-creation by offering it to just the "right" customers.
Be Clear About Rights and
Expectations. This is perhaps the most critical step in co-creation.
Customers need to trust producers not to misuse the information they provide or
unfairly exploit the relationship. Producers need to actively manage customer
expectations about how the relationship will evolve.
As Xoom.com, a free Web-hosting community with 6.3 million
users, discovered earlier this year, companies may create serious problems for
themselves when they rely solely on a legal contract to specify the rights of
customers and producers. They must also actively identify what customers expect
from them.
For example, Xoom.com does have the legal right to put
advertisements on personal home pages. However, it has achieved much of its
present popularity because it doesn't put banners, pop-up ads or watermarks on
users' home pages. When the service tested its legal right to do so, many
members were incensed and vented their anger on the Xoom.com message boards.
Xoom.com moved quickly to appease its consumer audience.
Control the Channels. Producers can
manage their brand risks by carefully selecting customers to support
co-creation, controlling the channels for presenting information or managing
co-creation by proxy. Mary Kay, a direct seller of beauty products and a
traditional co-creator that uses select customers as its sales force, allows
key sales agents to create personalized home pages on the Mary Kay Web site to
communicate to customers. Agents are not allowed to refer to the brand on their
own home pages. This policy allows the company to track how its key co-creators
present the brand externally.
Outsource Co-Creation. If a company
does not want to assume the risks and confront the challenges associated with
managing co-creation, it can sometimes have a third party manage the community
and still reap the benefits. For example, Earthweb manages communities and
creates content for computer professionals to help them resolve technical
issues they encounter in their work. A group of computer manufacturers supports
and sponsors Earthweb—effectively leveraging this community builder to create
value with customers for after-sale product support.
Provide Capabilities for Co-Creation.
Companies must provide customers with the right tools and training to co-create
efficiently. Companies like Yahoo!, a search engine, and GeoCities, a community
hosting service, provide co-creation opportunities for customers—in Yahoo!'s
case, in the creation of general news and financial information that target
consumers' special interests, and in the case of GeoCities, in the creation of
personal Web pages that are virtually effortless to implement. Companies can
reduce the customer effort that goes into co-creation by tailoring their Web
sites, using clear language and ensuring that various buttons and choices lead
to action-oriented outcomes.
Manage Incentives. Finally, companies
must provide the right reward and level of rewards for effective co-creation
behavior. For example, "Get Rich Click," a popular online sweepstakes produced
by direct marketer Yoyodyne, offered $100,000 in prize money; airlines give
customers fare reductions by offering discounted tickets when they purchase
online; companies like Amazon.com give customers status by publishing
reader-written book reviews; and countless online promotions offer the chance
to win prizes.
In addition to rewarding customers, producers can also
create sanctions to address legal and brand risks. The easiest sanction is to
restrict access to co-creation opportunities and rewards, just as users
temporarily lose access to America Online's system when they use obscenities or
improper language online, thus failing to uphold the company's terms of service
rules.
Seeing customers as partners in the creation of value
widens the horizons of companies entering the eEconomy. As intellectual
property and relationship assets become increasingly important sources of
shareholder value, co-creation not only provides ways to expand these assets
through customer involvement, it can also lock in those customers to the
product offering or service. For example, as customers create specific home
pages on portals or manage portfolios on specific Web sites, they create
information assets tied to these sites. They are unlikely to move these assets
unless the benefit of moving them far outweighs their switching costs.
The effectiveness of co-creation will depend on how much
value is created for both customers and producers. Companies will have to
select opportunities with the highest potential payoff, as well as structure
relationships to manage risks while reducing the effort required to fully
realize this new value. But that potential payoff will be substantial—a new
source of competitive advantage that encourages customer loyalty to a specific
value proposition in the eEconomy.
The New Customer-Value Equation Customer value is usually defined as the difference between
perceived benefits and perceived costs-a broad definition not always useful
when the object of the exercise is to understand exactly how value is created.
We define value in terms of the interaction of three variables: specific
customer needs, the attributes of a product or service and the overall cost
(the sum of price, risk and effort).
The needs, attributes and costs should be considered not
just in relation to specific products or services but also across the five
processes that customers take part in: buying, using,
selling/disposing of a product or service, integrating
multiple products to fulfill needs, and
co-creation. A number of examples from the computer
industry illustrate these interactions. Dell adds value in the buying process
by meeting the customer need for customization and low cost by selling
computers direct that are built to order. Software companies like Microsoft
meet the need for convenience in the use process by making software available
online for download. Gateway has dispensed with the customer need to
sell/dispose of obsolete computers by allowing customers to upgrade their
computers easily rather than get rid of them. Computer manufacturers like
Compaq are meeting the customer need for convenience in the integration process
by opening stores on the Web that simplify the purchase of related products
that customers can use with their computers. We have cited several examples of
the co-creation process in the main story.
Customer value is realized when product or service
attributes match specific customer needs arising from any of the above
processes at a cost considered reasonable by the customer. The greater the fit,
the greater the customer value created. Value, in other words, is very much in
the eye of the beholder. Nevertheless, electronic commerce forces managers to
rethink the value equation critically by creating new opportunities to fulfill
customer needs while taking into account what they are willing to pay along
each of the five processes.
Ajit Kambil is a New York-based
associate partner and senior research fellow at the Accenture Institute for
Strategic Change. As an assistant professor at the New York University Stern
School of Business, Dr. Kambil led a number of electronic commerce research
initiatives and introduced the eCommerce elective into the M.B.A. curriculum.
Bruce Friesen, an independent
organizational design and development consultant, is currently on assignment at
the Accenture Institute for Strategic Change. His most recent book is Broken
Promises: An Unconventional View of What Went Wrong at IBM (Harvard Business
School Press, 1996), co-authored with D. Quinn Mills. Mr. Friesen is based in
Boston.
Arul Sundaram is on assignment at the
Accenture Institute for Strategic Change. He previously worked at Proxicom,
where he developed Internet customer relationship management strategies for
clients of Global 1000, an executive search and advisory firm. Mr. Sundaram is
based in New York.
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