The overpowering goal of all firms remains to maximize shareholder value. And that isn’t much of a surprise since shareholder value is probably the highest metric any business can gauge their performance on. But, the way organizations work towards achieving this differs in principles. Organizations can be product-centric or customer-centric in their approach. All organizations employ a mix of both strategies to varying degree, as focussing completely on just one of them is never really a plausible approach!
Simply put, a product-centric organization focusses on their products while a customer-centric organization focusses on their customers.
A product-centric firm is fixed on developing the product, innovating and trying to reduce cost. Driving force remains looking internally at their capabilities rather than externally at what needs still remain unmet. Their profitability comes from volumes, and the business objective largely remains increase of market share. The organizational structure has product divisions. This kind of an approach is ideal in a seller’s market, where the seller has the greater amount of power and the competition isn’t enough to unnerve them. Not surprising then that this has been the norm in firms for a long, long time now.
A customer-centric firm, on the flip side, is fixed on assessing what the customer wants and delivering value. They have to fight in a competitive landscape to see that the customers buy from them. Profitability comes from creating value, not necessary volumes. The focus is on increasing wallet share from few valuable customers rather than necessarily on market share. Customer loyalty, cross-selling and premium prices are what create profitability for these firms in a buyer’s market. This has not usually dominated company strategies in the past, due to market situations.
However, firms today realize the importance of incorporating a healthy mix of customer-centricity with their product-centric nature. Due to new emerging trends in the last 15-20 years, the product-centric approach is no longer as great as it used to be.
Let’s get to discussing these limitations in the product-centric approaches in contemporary markets.
- Technology-enabled information flow:
Today’s customers are smart. Due to developments in information flow via the internet, they have access to much more information today. This makes today’s customers aware, unlike the passive purchase tendencies in the customers from the days of the past. Companies can no longer work their work around these customers by just focussing on their products.
- Technology-enabled delivery:
In older days, even if other companies were making products similar to yours, there was not much to worry because the communication and distribution systems weren’t robust enough for these competitors to really take over your existing customer base. The customers might not even be aware of your competitors and may not have access to their products, so they continue to rely on you. Today, we have great mass communication and distribution systems. This brings in a huge amplification in effects of competition, and to stand out, your company needs customer-centricity too.
- Technology-enabled product development:
Product life cycles have shortened. New companies enter markets rapidly because product conceiving is much faster and easier today. This has brought in a wave of commoditization. Products can now be commoditized and focussing just on your products is not the smart move in going a long way to differentiate your services to your potential customers.
Companies can’t regulate to maintain monopolies anymore. Instead, the government might choose to impose regulations on companies to ensure fairness in the system, by asking these big companies to act in a certain way. This has truly put competition at the forefront of challenges that firms need to deal with.
The sheer amount of data that can be yielded from business processes today can be humongous. Information systems enable customer-level tracking. Data can be a big game changer today. Companies can capitalize on the enormous potential of right data use to be much more effective at their business. A focus on this data would mean focus on customer-centricity.
- Increase in customer demand:
Customers are much more demanding today. They want “end-to-end” solutions which may require products/services from multiple vendors. This further inhibits commoditization. The company that can be sensitive to these demands of customers and offer exactly what they need, can go a long way in maintaining their stronghold on the market.
Customers today are looking for global products much more than ever before. This pits your company against essentially all the companies around the world working in your market. It’s more competitive than it has ever been.
All of these reasons show us why customer-centric management is inevitable in today’s markets if companies are to withstand competition and stay in the game. Now, to be truly customer-centric, not only do firms need to be interested in customers on a macro level but also at a granular level. It requires us to look ahead, figure out who the valuable customers will be, and do things for them to help them realize that we have their best interests in mind. Also, customer-centricity is not just a sudden ideological change. It requires companies to be willing and able to change its organizational structure, design, performance metrics and employee/distributor incentive structures to focus on this long run-value creation and delivery process.
The shift towards customer-centricity is a really exciting news for customers. When the firms focus on customers to win, the customers also win. Customer-centric firms celebrate customer heterogeneity, thus distinguishing the profitable customers from the less profitable ones, and focussing on these customers who offer a higher Customer Lifetime Value (CLV) to the firm. That’s actually great. For instance, if you’re a big-time Starbucks fan, and find yourself buying a coffee at Starbucks almost every day, how exciting it is to know that a customer-centric Starbucks now values you much more than just any other customer, and you’re in for really rewarding loyalty programs, discounts, offers, freebies, and customer service. If Starbucks plays it well, they will still accomplish increasing your wallet share towards Starbucks slyly, but you win too by getting more of a bang for your buck than before.
And, it’s really interesting to realize that none of this suggests that “non-focal” customers of a firm should be ignored. On the contrary, it is important to have a healthy proportion of such customers to add a high degree of stability and robustness to the overall customer base. This is the paradox of customer centricity: the more a firm tightens its central focus on a select group of customers, the more it needs its “non-focal” customers to stabilize the overall mix.
Thus, with customer-centricity, everybody wins – the organization, the focal customers, as well as the non-focal customers!