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September 22, 2003
Excerpt from Convergence Marketing: Strategies for Reaching the New Hybrid Customer
By Vijay Mahajan and Yoram (Jerry) Wind
The Centaur Awakens
The following scenario is not of some distant or unlikely future. It is not some glowing vision of technological utopia or some ode to the old ways of marketing. It is here and now…the complex reality of marketing in an age of rapid change, and a portrait of the emerging centaur. As the centaurs emerge, moving between real and virtual worlds, companies need to develop new convergence strategies to meet them. Sally Anderson wakes on a Saturday morning in her home outside Philadelphia, Pennsylvania. She fills her coffee maker and fires up her computer. As the coffee drips, she clicks on a link to a web camera focused on a tiny city on the southern coast of Norway. She notes with some satisfaction-and no small amount of longing-that the village square in the city where her grandfather was born is filled with snow. She is a cold-weather person and nothing warms her heart so much as those white drifts. After a long week of work at her own accounting firm, she enjoys leisurely checking her personal email, then reads a joke sent by her cousin in Austin, Texas, with the kind of attention and interest that direct marketers only dream about. She forwards it to a group of friends on her "humor" list. Sally then looks in on the progress of an eBay auction for a ceramic doll that she is within a few hours of winning. She logs out and walks to the curb to retrieve her newspaper from the puddle at the end of the driveway, which her carrier invariably targets. As she peels back the soggy plastic bag, she sits down at the kitchen counter to read the daily headlines, browsing through the newsprint in the same way her grandfather did a century before.
After driving her 12-year-old daughter to soccer practice at the Y, she pulls into the Fresh Fields supermarket. She carefully selects a dozen oranges, squeezing them to make sure they are not overripe. She tries a sample of a new coffee offered at a small table at the end of the aisle. It is quite good, and the peel-off 50-cent-off promotional coupon on the front of the package clinches the deal. She drops a bag in her cart and walks into the personal products aisle where she picks up a bottle of discount shampoo for her husband. She doesn't buy her own shampoo at the store anymore, but instead purchases "Sally's Own" shampoo and personal products through Reflect.com, a customized beauty products site. But her husband, with typical masculine indifference, prefers to use whatever is cheapest. Sally bumps into a friend at the checkout and they exchange a few words as she enjoys the relative freedom of standing in a supermarket aisle without the pull of children or work. Her friend recommends a new book she has been reading, Mary Karr's memoir Cherry, and Sally makes a note of the title on her Palm Pilot.
After putting her groceries in the van, Sally goes ten minutes down the road to Nordstrom, where she needs to pick up a dress for a dinner she is attending with her husband Sunday night. She returns a pair of Nine West shoes at the store that she had bought at the Nordstrom.com website. They didn't look as good in real life as they did on the screen. She walks through the dress department, running her hands across the fabric as piano music drifts through the aisles. She still has an hour before she needs to retrieve her daughter. She tries on several dresses before taking a particularly flattering one to the checkout and is snagged by the allure of the perfume counter, where she picks up a new fragrance.
Sally picks up her daughter and goes home to make lunch. After lunch, she logs in to Amazon.com and orders the book Cherry with one-click purchasing. While she enjoys an afternoon sipping cappuccino at Barnes & Noble, those days have been few and far between since she started her business. There is no quicker way to send a book speeding to her doorstep than a visit to Amazon.
She receives an email from Peapod asking her if she'd like to renew the regular care package she sends to her 19-year-old son who is studying at the University of Chicago. She sends the care package of his favorite foods every two weeks to his dorm room. She asks for delivery after 7 p.m. that evening. It is a way of showing that she cares and also assuring that the kid won't subsist on chips and soda. The message jogs her memory that she needs to book an airline flight back to Philadelphia for him during winter break in three weeks. She checks prices on Hotwire.com and finds a ticket for just $149. It is a good price, but she decides to go to Priceline.com and submit a slightly lower bid to see if she might beat it.
Sally receives an email from her older cousin in California, who shares a recent photo from a family reunion. Sally forwards the photo to her mother, and would love to pass the photo along to her grandmother, now in her 80s, but the older woman has never touched a computer keyboard. Sally had seen an advertisement for a digital picture frame, and since her grandmother's birthday is coming up in a month, Sally decides to look into it. She goes to MySimon.com and types in a search for "digital picture frame," finding a comparison of vendors that sell the Ceiva frame she is looking for. The same frame that costs $284.99 at Amazon is only $279.95 at a company called Smile Photo Video and just $224.57 at AccessMicro. Amazon has a three-star merchant rating while AccessMicro only shows two stars, but for a $60 saving, she's willing to take her chances. She clicks through and buys. She can't wait to tell her family they can post photos to the site that will be downloaded automatically to her grandmother's frame.
Anxious about a visit to the doctor on Monday to discuss her problems with carpal tunnel syndrome, she goes to iVillage.com and reads an answer from a doctor about paraffin and vitamin B-6 treatments. The doctor on the site also discusses a variety of other treatments from acupuncture to enzymes. Sally enters the iVillage chatroom on carpal tunnel syndrome, where she reads a post by a woman about a new type of therapy. Sally posts a question to the woman about the treatment, and without waiting for a reply, does a search. She finds an Australian website with information on the therapy and prints out articles to take with her to her doctor. Her doctor hadn't told her about many of these approaches on her last visit. He's supposed to be an expert in the field, but she now begins to have her doubts.
How do you combine online and offline behavior in your own life? How do your customers interact with your company online and offline? Why do they choose one channel over another?
After finishing some housework and making dinner, she curls up with her husband in front of the television for a little down time. She and her husband laugh at a Pepsi commercial featuring Bob Dole that they saw during the Super Bowl. It is just as funny the second time. Their only difficult decision is which of the hundred or so channels they want to watch.
MEANWHILE, BACK AT MISSION CONTROL…
In a command center deep in the heart of a modern corporation, the marketing department is worried. Sally Anderson and many other consumers who have responded well to mass media advertising appear to be slipping away. The very channels used to connect to them are disintegrating, first into hundreds of television channels and now-even worse-into billions of whizzing packets jettisoned around the planet. These customers were once passengers on large segmented ships on clear trajectories. Now they are exploding into atomistic markets of one, rocketing out to the farthest fringes of the universe. These customers are connecting with the company and with other people in a free-form, self-organizing, organic way. In other words, in a way that the marketers can't directly control. And this has them worried. Sally and other centaurs-half wired, half not-are living intertwined lives. Sally divides her shopping cart and information gathering between the online and offline world (as illustrated in Exhibit 1-1). She picks up her paper at the curb and her milk at the grocery store, but she also looks to the Net for information and sends her son groceries through Peapod. In some ways, traditional approaches and conventional wisdom about marketing continue to hold. In other ways, this consumer acts quite differently. She acts differently in various situations and there are huge differences across people-even if they appear to be in the same demographic segments.
This marketspace (as opposed to the traditional "marketplace") is more than a new location or new channel, as the marketing department had originally thought. It turns out to be something far more insidious. Now the marketers-at both manufacturing and retail firms-are trapped in some sci fi movie in which the customers are beginning to mutate, a business version of Invasion of the Body Snatchers. The marketers at Mission Control never had to ask permission to market. 1 They never worried about creating a "community." They focused on segments of customers, so they didn't need to know what was going on inside Sally Anderson's head. When their predecessors offered a new washing machine or box of Tide to Sally's mother, they focused on market segments, not individuals. (Of course, Sally's mother, like many of her peers, is now online, receiving photos of her grandchildren and passing along recipes to Sally.) In those days, all marketers needed to know was that the consumer was part of a herd. Markets were broadcasts, definitely not "conversations." Now something is changing, but the change is also not as absolute as some initially thought it would be. Instead, a new consumer, a hybrid, a centaur, is emerging-and this requires new approaches to marketing.
How do you need to rethink your approach to marketing in light of the new hybrid consumer?
THE CHALLENGE OF THE CENTAUR
Sally Anderson probably doesn't know it, but she is changing the discipline of marketing. The most radical shift of marketing in the digital age is not merely the emergence of new technology or channels, but transformations deep inside the consumer. The new technologies have changed the way customers behave-what they expect and how they view their relationship to corporations-online and offline. Sally Anderson probably would not consider herself a cyberconsumer, the term used to refer to consumers who purchase online, but she leads a very different life than her mother or grandmother did at her age. She and the other emerging centaurs-and even more so, her children-are radically transforming the practice of marketing.
The Internet and other technologies allow Sally to do things that she could never do before. They permit her to fulfill basic human demands and desires in new ways (as summarized in Exhibit 1-2). While these capabilities-for customerization (customized products and services and marketing), community, channel options, competitive value, and choice tools-are now widely recognized, they have often been considered in isolation. This view tends to overemphasize how the world will be changed by the technology rather than how the technology will be changed by the world. For example, customization technologies allow Sally to have tailor-made products, marketing messages, and experience, yet she often chooses instead off-the-shelf products, mass messages and standard shopping experience. Why? She can be part of a vast array of virtual communities, but spends her life moving between online and offline communities. Why? She will sometimes buy online, sometimes by phone, and sometimes at a physical store. Why? She can choose a wide range of pricing models and in a single day might buy from an auction, fixed price, or name-your-own-price system. Why? She will sometimes accept the marketing messages of companies and sometimes seek out third-party information. Why?
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We selected these five areas-customerization, community, channel options, competitive value, and choice tools-because they represent important intersections between the potential of the new technology and the enduring patterns of human behavior. How consumers and technology interact in these areas has implications for marketing and business strategy. For each of these "5 Cs," there is a convergence between the traditional behaviors of consumers and new behaviors. Now that we know what consumers can do with the technology, we have to look more carefully at what they are likely to want to do.
The challenge for organizations is to understand what these underlying desires and complex behaviors mean for marketing and how to meet these needs. Which traditional marketing concepts still work, and which ones do they need to eliminate or change? Which new marketing approaches do they need to add?
This emerging centaur has enduring human needs and desires, but these have been sharpened and attenuated by the promise of technology. These needs and desires include:
- Desire for uniqueness, personalization, and customization: Sally now expects the world to revolve around her. Large corporations are expected to know her likes and dislikes. Sally and her peers, and even more so her children, don't even want to have to ask for what they want. ("You should know what I am thinking!") Sally might be pleased when Marriott brings a Diet Coke with lime to her table anywhere in the world without being asked (provided she has not changed her preferences) and she values Amazon's recommendation for a book that proves to be a keeper. But she is very quick to get angry when she calls her phone company about a problem and has to give the same information to three different representatives. ("Why don't they know me? I've had my phone service with them for more than a decade!") At the same time, she does not want to have her privacy compromised in any way, and she reserves the right to change her mind. So companies have a hard time knowing where to draw the line in this personal service. Companies like Amazon or Schwab are personalizing their interactions with customers. More than this, Sally wants customized products and services, like the shampoo she buys from Reflect.com. On the other hand, her husband is happier just to buy something off the shelf, and Sally wants to pick out her oranges personally. Sometimes Sally and her husband just want to curl up in front of the tube and watch the messages that are pumped into their living room. How do companies effectively combine customization with mass production? How can they balance mass messages with personalized interfaces? How can companies provide the right mix of off-the-shelf and customization? How can they create flexible systems to offer options to customers without overwhelming them, and then design their product development systems to deliver those options quickly? How can companies use marketing communications to offer coherent experiences to consumers and build lasting relationships with them?
- Desire for social interaction: People have always had a desire for social interaction, but the centaur has more opportunities to participate in online and offline communities. This has created new expectations. Sally goes to iVillage for medical advice because she feels comfortable sharing her challenges with other participants in the chatroom. People can flow in and out of them with a click. On the other hand, these virtual connections can be quite deep. For example, one woman's post on a mother's message board at iVillage read: "This board has become my solace in a hectic day." Another single mother wrote to the pregnancy message board that the community had helped her "get these secrets off my chest and was surprisingly nonjudgmental." As an indication of the bonds formed by these online relationships, the woman said she was surprised to receive baby gifts from women she had only met online.2 Where the marketing discipline focused on "positioning," encouraging a customer to identify with a certain community (sporty and upscale suburban professionals who buy SUVs, for example) or identifying affinity groups, now the idea of community is much broader and more interactive. People are seeking out others who share their own interests (people who paddle kayaks in the Northeast who happen to own SUVs, for example) or are facing a similar challenge (women preparing to give birth). They are forming communities that are powerful and have a profound impact on their lives. The challenge for companies is to turn these communities into commerce. Even "successful" communities such as iVillage and Turf.com have yet to demonstrate their financial viability. How can companies create a convergence of the economic and social aspects of communities, finding profit without destroying the community in the process? How can companies build communities or tap into existing ones? How can companies leverage the centaur's participation in both real and virtual communities to develop convergence strategies?
- Desire for convenience and channel options: Convenience once meant a store on every corner, but now the 24-hour "convenience" store no longer pushes the limits of convenience. Sally can purchase books, electronics products, and airline tickets outside of standard business hours. Consumers can download software and other digital products immediately. Still, convenience is not defined by the company but by the consumer. They want a richer set of relevant channel options, the ability to do what Fidelity Investments has referred to as "click, call or visit" strategy, offering multiple channels that provide seamless access to the company. Companies need to be able to interact with customers in multiple locations and through multiple channels, when and where the customers want to interact. How can com-panies offer multiple channels for interaction and ensure these channels all work together? How can both manufacturers and retailers reshape their strategies for these new channels?
- Desire for competitive value: The value equation is being redefined. The technology facilitates the application of pricing models such as auctions or name-your-own price strategies. There is a convergence of buyer-initiated and seller-initiated pricing models. Sally pays fixed prices in the grocery store or Nordstrom, but names her own price on Priceline and participates in an auction on eBay. But pricing changes are just part of how the value equation is changing. The value equation is being reshaped as companies focus on broader definitions of value that include not only product and price, but also factors such as novelty, control, and speed. The underlying product is being redefined as it is increasingly bundled with information, education, and entertainment. These options have changed the way the centaur thinks about pricing and the way companies need to shape their value propositions relative to their competitors. How can companies reshape their approaches to pricing to take advantage of new flexible pricing strategies and still generate a profit? How can companies address the higher expectations of customers for value and service?
- Desire to make better choices: People want to make informed decisions, but often the information is not available or it is in the hands of the seller. The Internet offers the opportunity to put more tools in the hands of customers and this has changed the behavior and expectations of the centaur. Sally uses MySimon to get a better deal on the digital picture frame for her grandmother. An increasing array of decision tools are helping customers simplify their process of searching and buying online. Companies like Bizrate provide even evaluations of company performance based on surveys of individual customers. These are only a foreshadowing of more powerful shopping bots that are waiting in the wings. But information changes the balance of power in relationships. Even the physician, who was once viewed as a god, is being dropped a notch or two thanks to abundant medical information that can be found online. After finding medical information online, 15 percent of patients were more likely to question their physician's knowledge and 9 percent said they were considering looking for a new doctor.3 Companies are understandably reluctant to put all the tools in the hands of consumers. Does Amazon want customers to know that AccessMicro can beat its price on Ceiva photo frames? How can companies offer customers decision tools to simplify their decisions, without driving the customers to competitors? How can tools typically used inside the company be put into the hands of consumers (for example, allowing customers to access their bank or loan information online) to the advantage of both? Given that customers have access to more decision tools, how do companies need to reshape their strategies?
What opportunities are created for your business through the new potential for customerization, communities, channel options, competitive value equations, and choice tools? How can you take advantage of these opportunities?
These five interrelated opportunities created by the centaur require companies to rethink their approaches to marketing. What parts of their traditional marketing practices need to be modified or abandoned? Which new capabilities and practices need to be added to their portfolio of tools? Companies need to find new ways to create customerization, build communities, provide relevant channel options, offer competitive value, and provide decision tools to customers. The way companies have creatively met these challenges, and especially the challenge of addressing different combinations of these needs for different segments, will be the focus of the second section of the book.
RUNNING WITH THE CENTAUR
In addressing the challenge of this hybrid consumer, there are two primary types of mistakes companies make: treating the centaur as a completely different phenomenon or treating the centaur as the same as the traditional consumer. Both mistakes are equally disastrous.
- What the dot-coms failed to see: Many of the early dot-coms made the first mistake. They were so enamored with their hot technology, business models, and hoards of venture cash that they forgot about the customer who was allegedly at the center of their business proposition. Many online companies assumed that making the shopping experience more efficient would be a great plus for consumers. But these companies apparently failed to see that many consumers actually like to shop. They may want to run their hands down rows of clothing in Nordstrom, or sip cappuccino in Barnes & Noble. A study of 48 dot-com failures found that many of the failed companies had a flawed understanding of their customers.4 Companies also ne-glected to apply fairly simple marketing tools for measuring customer loyalty and other factors that could have provided clear insights into the future challenges they would face in building their markets. Online marketers have often failed to recognize the diverse reasons why people buy, and how these motivations affect how they buy. 5 These companies have stood at the tail of the centaur and described this consumer from that perspective.
- What the oldline firms are slow to recognize: At the same time that many online firms have failed to see how the centaur is similar to the traditional consumer, oldline firms often get into trouble when they fail to recognize how the centaur is different. Companies thought they could just drive their banner ads onto this new medium or publish their brochureware on a website, like billboards on the Information Superhighway. Consumers were not interested. These centaurs needed more interaction, engagement, and individual attention. Companies need to offer multiple channels. The Web also offers opportunities for market expansion, opening new geographic markets or customer segments-but only if companies recognize this and take advantage of it. We must stress that we are not saying that marketing, as we know it, is dead. Far from it. Some of the old marketing tools and models work well in the new environment, but some need to be discarded, modified, or added to. Companies clinging to traditional approaches have stood at the front of the centaur, focusing on the continuity, and fail to recognize sufficiently the differences. Even now, when more firms recognize the potential of the new technologies, many are limited by short-term financial objectives or organizational processes from developing or implementing convergence strategies. They don't have the courage or capacity to change their wheels while they are driving the car, so they fail to undertake the large-scale transformations that companies such as Charles Schwab, General Electric and Enron have made.
As a manager of an established firm, how can you take advantage of the power of the hybrid consumer to transform your marketing strategy? As an online firm, how can you take advantage of the wisdom of traditional marketing to strengthen your strategy?
Companies that are still standing after the dot-com collapse and have capital to invest have a tremendous opportunity. As Andy Sernovitz, CEO of consulting firm GasPedal Ventures, commented, "We've developed techniques and tools and business processes that never would have been built in a normal economy. How can you steal the stuff that the Internet kids with the earrings invented and apply it to your business? If you have a company and decent business sense, it is a wonderful time to make a lot of money."6 The key is to be on the leading edge, but not the "bleeding edge." Since no one really knows where this line is, companies need to engage in continuous experimentation to find out what works. This way you can make small investments that enhance your future learning, yet still manage the business for the short-term. Keep your eye on the consumer. By gaining a deeper understanding of consumers, you can stay with the centaurs, instead of getting too far ahead or behind.
The 20/20 Vision of 1-800-CONTACTS
There are tremendous opportunities in addressing the interrelated aspects of the emerging centaurs such as Sally. For example, 1-800-CONTACTS, the world's largest direct marketer of contact lenses, has aggressively migrated its business from the telephone to the Internet. Online orders, which accounted for just 4 percent of its business in 1998, shot to 37 percent in 2001, making it the Internet's largest contact lens store, with online revenue of $53 million. Even more significantly, online sales were driving the future, accounting for a third of new orders. (Of course, its cyberactivity brought the company into greater conflict with its real-world rivals, private optometrists, and national vision chains, who have raised protests.) With a multichannel strategy of accepting orders by "phone, mail, fax and the Internet," the company's overall revenue continued to climb rapidly, to $145 million in 2000 (as shown in Exhibit 1-3).
1-800-CONTACTS also built upon its existing successful business in telephone and mail order sales, leveraging the resources of its customer service and warehouse. In a single warehouse in Utah, the company stocked more than 10 million contact lenses, delivering 100,000 (more than two tons) every day to consumers. The inventory of name-brand contacts allows the company to ship 90 percent of its orders within 24 hours of receipt.
What is it about the company that made it so successful in online business? This winner has a somewhat different profile than one would hypothesize. First, the product was physical, not digital as was expected, but it was perfectly suited to online sales. Contact lenses are easy to specify (search goods) and the wearer is accustomed to regular replacement of this disposable product. The purchase price was fairly high and the mailing and inventory costs were low because of the small package size and light weight. People don't select contacts the way they pick up oranges. They don't buy them for gifts or need to research them extensively before making the decision to purchase. More than 60 percent of sales were repeat and replacement purchases, which lowers the amount of information and emotional involvement. The product also was not a "new-to-the-world" product nor was it customized, but rather something that was tried and true. The company also had no alliances, which was counter to expectation and counter to the many alliances of Amazon.com. Yet the key to the success of 1-800-contacts.com is that very few of the reasons why the centaur might shop offline applied in this business.
Convergence Marketing
As 1-800-CONTACTS found, there can be tremendous opportunity in creatively developing a new set of strategies to meet the centaur across multiple channels. There is no simple formula. Not every product or market lends itself to the approach taken by 1-800-CONTACTS. Every company must determine how to best balance the complex demands of the various segments of hybrid consumers. By better understanding these needs of the centaur, companies can better develop online and offline strategies that work to meet these needs. Just as retailers are learning to combine "clicks and bricks," marketers need to combine traditional marketing strategies with emerging online strategies. On the following pages, we explore approaches to marketing to the centaur. It is not a revolution-with crowds racing through the streets toppling over the statues of the past. It is not the end of marketing as we know it. These revolutionary slogans are focused on the cyberconsumer, but centaurs are not strictly cyberconsumers. Nor is it the continuation of the status quo. These centaurs are not entirely traditional consumers. They are a creative fusion of the two, coming in many shades along the spectrum from cyber to traditional. The centaurs demonstrate that the basic human wiring of customers remains the same-but the software of expectations and interactions running through their heads and hearts is now quite different.
As much as Sally Anderson has already started the transformation of the centaur, her children will be even more immersed in this world. They will be more comfortable with the technology, and will lead the way into wireless m-commerce and m-lifestyles, broadband interconnectivity-and whatever happens next. The certainty is that there will be new technologies and business models and this new generation will find new uses for them, which their originators and the businesses that rolled them out never envisioned.
It is a complex picture. Human beings are complex beings- and even more so now that they have begun to consort with smart technology. The companies that can understand these changes will find new ways to connect with their customers. Companies that don't focus on the centaur will be missing a big opportunity. To capitalize on the opportunities presented by the centaurs, companies need to run with them. To meet the new realities of this converging consumer, companies need to create convergence of their own marketing approaches, joining old and new, online and offline. They need to create new strategies for customerization, communities, channels, delivering competitive value and offering decision tools. In the process, they will reinvent their companies and the marketing discipline, leading to the convergence of diverse functions within the organization and a drawing together of internal and external stakeholders. This book and the stories of pace-setting companies discussed herein are designed to help point the way.
NOTES - Please see the print edition for complete notes.
1 Seth Godin, Permission Marketing, New York: Simon & Schuster, 1999.
2 Lisa Kraynak, Vice President of Strategic Development, iVillage, Wharton conference on "Virtual Communities and the Internet," April 2000.
3 Sean Nicholson, Wharton Virtual Test Market, presentation to ICG/Wharton Forum on e-Business, December 5, 2000.
4 Mahajan, Vijay and Raji Srinivasan and Jerry Wind, "The Dot-Com Retail Failures of 2000: Were There Any Winners?" working paper, McCombs School of Business, University of Texas at Austin, 2001.
5 Balasubramanian, Sridhar, Vijay Mahajan, and Raj Raghunathan, "How Consumers Buy May Affect the Utility of What they Buy," working paper, McCombs School of Business, University of Texas at Austin, 2001.
6 Remarks to the Wharton Fellows in e-Business Program, at idealab! New York City, May 9, 2001.
7 1-800-CONTACTS Form 10-K, 2000; and www.1800contacts.com.
8 Mahajan, Srinivasan and Wind, see note 4 above.
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