In the introduction to a Customer Experience Compendium (2017) the McKinsey & Company authors began by saying, “Across sectors and regions, business leaders are recognizing the competitive advantage of superior customer experience and the value that resides not only in what a company delivers for its customers, but in how it delivers products and services”. They were referring not to value for the customer but value the business might capture for itself.
The compendium speaks of the “new horizons” in customer experience. Among them, “a set of new emerging capabilities to capture the value from customer centric strategies, in particular design thinking and digital application”. And in a 2019 article, McKinsey & Company recommend using a “customer experience measurement system”, which “links business impact (increased revenue, cost savings) to all the elements that drive customer-satisfaction improvements”.
The emphasis on “value capture” for the business, rather than customer value creation is, in our view, a very old school way of thinking. Rent seeking, profit maximisation and maximum customer ‘wallet share’, by cross-selling, up-selling, dynamic pricing and other industrial-era tricks, all illustrate a standard industrial era mindset. It is the approach of those who obsess about performance, efficiency and cost control as the way to maximise profits, shareholder value and the market value of the business. It is an approach that ignores the wise advice of management guru Peter Drucker, the only purpose of a firm is to earn and keep a customer. And only by doing so is the business able to earn itself sustainable income streams and profits.
The idea of putting the new and emerging capabilities to use to “capture the value” reflects the typical way incumbent businesses have traditionally seen the opportunities new technologies offer . It leaves them exposed to the real potential of disruption by challengers who instead use new technologies, usually linked to new business models, to win customers by offering them additional value.
History shows technology innovation, combined with business model innovation, and driven by a focus on customer value creation, usually provides a winning formula. Not an obsession with performance, profitability and value capture. Of course, no firm should ignore performance, profitability and value capture. They must simply avoid seeing them as the primary goal. That should always be creation of more customer value, the results of a continuous iterative process driven by innovation and approached in a systemic way.
Two companies provide illustrations of bad and good approaches, Kodak Corporation and Fujifilm. Both faced disruption for the same reasons. Despite having been an early pioneer of the first digital camera Kodak gave up on the project to focus on its more profitable photographic film business. It was a decision that led to bankruptcy. The story of Fujifilm is told by its former CEO and Chairman in his book Innovate Out of a Crisis. His strategy was to embrace new technologies where the business could combine them with existing capabilities to create new sources of customer value, for existing and new customers and markets. It survived and thrived.
The Fujifilm example illustrates another key point, customer value creation must consider the whole value proposition. Customer experience is only a part, and rguably not the most important part. It is only how the firm delivers value. It cannot be more important than what value the business offers in the form of products and service. As Andy Wilkins, CEO of BE Advisory has pointed out many times, if the whole proposition is not considered, the customer experience could be little more than “lipstick on a pig” – an expression used to convey the idea that making superficial or cosmetic changes is futile.
Fred Reichheld, a partner at Bain (the consulting firm that created the customer experience measurement tool they call the Net Promotor Score System) lends support to our argument, that the focus needs to be on the whole value proposition, not only customer experience. In a recent article, following the publication of Bain’s UK Consumer Study which found only 10% of UK brands excel at customer experience, Reichheld says, “too many companies confuse the goal of enriching customer lives with the tool to help achieve it”, adding “the goal is to increase the number of customer lives you enrich on a sustainable basis. After all, the ultimate objective, the purpose of any great organization, is to improve people’s lives”. But you don’t do that by focusing the use of new technologies on new ways to grow the value you capture from customers. You do it by focusing on ways to deliver ever more customer value.
Another major problem with the customer experience measurement tools is that they use a limited number of criteria to allow businesses to benchmark themselves. This is a problem because, as the UK Consumer Study found. Why? Because, each of the brands in the top 10% has their own recipe for success. In other words, it is not their benchmark score that is important. It is the uniquely valuable approach that earns them their score.
Each business needs its own valuable formula for customer value creation, to what value it offers (the product and / or service), and how it offers it (the customer experience). But there is ample evidence, some provided by McKinsey & Company surveys, that most directors and executives are unable to articulate what value is created by the firm they govern and manage, for whom it is creating value, or how it creates it.
The number of directors and executives that can answer these fundamentally important strategic questions is probably in the low single digits, in percentage terms. This suggests most customer experience initiatives can be no more than futile efforts. So, we suggest their focus needs to shift from customer experience (CX) to customer Value (CV), to consider customer value as a whole. And the focus should also be on customer value creation, not customer value capture.
To achieve the shift directors and executives must reframe their thinking, establish new priorities and adopt new management tools and methods. They need to be able to design a Value Scheme, based on a clear understanding of the customer value proposition. It means understanding the opportunities to put new technologies to use in the creation of innovative ways to create new customer value, often linked to business model innovations. It means viewing the business, including its internal and external stakeholders, as a customer value creation system. And it requires businesses to transforming many competitive and transactional relationships into partnerships focused on the co-creation of new sources of customer value.
Businesses that do not transform themselves to become platforms for customer value creation are certain to find themselves being disrupted by new competitors with new business models designed to do more than put lipstick on a pig. The unicorns - as Amazon, Google, Uber and their peers are called - developed new customer value based on technology and business model innovation. In the face of such competitors’ businesses that think it is enough to limit their efforts to improvements in customer experience, and to capture value from customers for themselves, are very likely to find their efforts futile.
BE Advisory offers a range of “From CX to CV” products and services, to help firms fully understand why they must shift their focus: a keynote presentation, a short board briefing, a 1-day Executive Workshop and a 3-day (or 6 x 1/2day) Transformation Course. Email for details: contact@beadvisory.
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