Jagdish N. Sheth, Emory University & Rajendra S. Sisodia, Bentley College | Marketing efforts in the past have been inordinately geared to acquiring customers, with insufficient attention given to how best to retain and maintain those customers. As a result, most customer-provider “relationships” are intermittent, stop-and-go affairs. Experience curve effects – the benefits of mutual learning – are lacking, since every transaction is similar to the first transaction. The marketer fails to become more efficient and effective in meeting the customer’s needs over time. The automation of consumption is CRM’s response to this chronic oversight. But it requires the existence of a high level of mutual trust and respect between customers and marketers. Without trust, both sides will withhold information and access that is essential to value-creation.
The marketing function has gone through a number of transitions over the years in a search for more efficient as well as effective operating models. One of the key drivers of change has been the need to create a more efficient match between supply and demand, since many potential sales are lost due to the lack of the right inventory at the right time and place. To this end, many business-to-business companies in the past decade have moved toward the practice of automatic replenishment” or “vendor-managed inventory,” in which manufacturers take on the responsibility for managing inventory at the retail level. Monitoring starting inventory levels and sell-through volumes, manufacturers automatically ship additional merchandize when stock is depleted. The advantages of this approach are several: stock out situations are greatly reduced, and many administrative costs associated with ordering, invoicing and billing are reduced or eliminated. Implemented effectively, this approach results in higher levels of product availability at the point of purchase with much lower average levels of inventory. The track record has been very strong; 80% of retailers now use some form of automatic replenishment, and companies have reported up to 400% increase in inventory turns and 75% reduction in stock out situations.
Looking for a Better Way in Consumer Markets
Beset with inefficient and ineffective marketing approaches, the consumer market is now ripe for the widespread deployment of this approach. We strongly believe that marketing efficiency as well as effectiveness in consumer markets can be greatly increased through the routinization and automation of purchase and consumption. With creativity, imagination and sound marketing, these arrangements could go considerably beyond “automatic replenishment” and become commonplace in the near future.
The pressures that make this an appealing concept have been building for quite some time. Rising incomes, escalating time pressures and a critical mass of affordable and powerful enabling technologies, are driving the trend toward the automation of consumption. The affluent class now represents over 35 million households out of 110 million in the U.S. Purchases of so-called luxury goods and services are growing at about four times the rate of overall spending. Over 65% of women over the age of eighteen and 75% of mothers will be working full-time by 2000, making households more wealthy but time-poor.
The automation of consumption can take place directly between consumers and manufacturers for larger purchases, and through intermediaries for smaller purchases. Suppliers of large items or major services will have a great opportunity to become the “one stop shop” supplier of choice for an ever-widening array of goods and services.
The automation of consumption, first and foremost, is aimed at simplifying life for buyers as well as sellers. For example, buyers should be freed of the burden of monitoring inventory levels of frequently purchased goods. It is about understanding customers so deeply and thoroughly that marketers can anticipate their needs and wants, often even before the customers themselves are consciously aware of those needs and wants. It reflects a “customer business development” mindset (becoming common in business marketing situations) applied to the consumer market, wherein marketers and consumers continually look for opportunities to elevate the mutual gains from their relationship. It is, in brief, auto-pilot marketing, in which most human intervention may only be required at take-off (relationship creation) and landing (relationship termination, in the event that it ceases to make economic sense).
Marketing efforts in the past have been inordinately geared to acquiring customers, with insufficient attention given to how best to retain and maintain those customers. As a result, most customer-provider “relationships” are intermittent, stop-and-go affairs. Rather than building on previous interactions, every encounter is treated like a new beginning. It is a well-known principle in physics that it is much harder to get a stationary object to start moving than it is to keep a moving object moving. In other words, “static friction” greatly exceeds “kinetic friction.” In most marketing, however, the customer relationship starts from a standstill position every time, and is thus subject to a high level of static friction. Experience curve effects, i.e., the benefits of mutual learning, are lacking, since every transaction is similar to the first transaction. The marketer fails to become more efficient and effective in meeting the customer’s needs over time; likewise, customers continue to perform like novices in the relationship.
The current buying mode for many customers is “just in case” purchasing; large amounts of opportunistically-acquired inventory accumulate in the basement. The automation of consumption will lower system-wide costs and improve value delivery to customers. This should result in higher overall profits; a well-honed approach will lead to large amounts of new value creation generally. Consider the benefits from Baxter’s ValueLink system, which delivers hospital supplies directly to nurse stations and operating rooms rather than to a central warehouse. This allows hospitals to convert warehouses into clinical space. Likewise, consumers will be able convert inert storage space into usable living space.
Confronting Customer Cynicism
Many marketers many view today’s customers as increasingly capricious: fickle, cynical, disloyal. Customers have evolved these defense mechanisms as a natural reaction to decades of marketing manipulation, noise and sheer excess. Through long experience with never-ending promotions and marketing’s long history of over-promising and under- delivering, customers have been trained to be highly deal-prone and cynical about marketing claims. They have low and declining brand loyalty, and little tolerance for under-performance. They switch suppliers at the smallest provocation, as evidenced by extremely high chum rates in many industries; in the telecommunications industry, for example, chum rates range from 30-50% a year in sectors such as cellular telephony and small business long distance service.
Customers today also have more knowledge and thus power than ever before. In part, this is due to the sheer availability of more objective information (much of it from new third party providers) than before. It is also due to customer cynicism; lacking trust in marketers, they feel the need to “arm” themselves with as much unbiased information as possible.
To many traditional marketers, with their antagonist view of customers, this knowledge is a threat; it allows customers to win every round, to “get a better deal” with them each time around. For more enlightened marketers, however, knowledgeable customers are an advantage. If a company is confident that it is delivering good quality and value, it can leverage its customers’ knowledge and expertise to mutual advantage. Such customers may be more demanding in terms of quality and value, but typically have fewer requirements for customer service and support.
Consumer Stress and Distress
Our consumption-driven society is taking a heavy toll on many consumers, not because there as too much consumption but because of the additional burden it places on consumers seeking to make reasonably informed purchase decisions. One of the ironies of how markets have evolved in the last few decades is that even as consumers have been presented with many more choices in the marketplace, the actual differences between the offerings have shrunk. With the widespread adoption of standardized production approaches such as TQM (total quality management) and ISO 9000, average product quality has improved, but so has the level of standardization and conformity across products. Even “generic” products offer good quality and a high level of standardized capabilities. Consumers are thus faced with the prospect of engaging in a great deal of shopping behavior (given the abundance of pseudo-choices and seemingly random price differentials across stores and over time) with little incremental value to gain. There is little actual product differentiation (most differentiation today is image- based rather than innovation-based), and almost no customization or personalization in what customers do buy. To make matters worse (for consumers as well as marketers), advertising intensity correlates negatively with real product differentiation, so that the products most often advertised have little meaningful to say.
The result: the true “ROl” (return on investment) on shopping effort is very low, given the amount of time and physical and mental effort expended and the high level of commoditization in many product categories. The greatest tangible benefit of shopping effort to consumers is usually a defensive one: to ensure that they did not fall victim to opportunistic marketing tactics, and hopefully, to try and take advantage of some ill- conceived tactics. Many customers also face high opportunity costs of shopping effort (alternative uses of time to pursue personal as well as professional goals). If such customers forego extensive shopping effort, they risk being victimized by unscrupulous marketers.
No wonder, then, that consumers find many buying situations stressful — cars, groceries, clothing, financial products — and very few enjoyable. Many are paralyzed by simply too much choice — too many cereals, too many clock radios, too many TV channels. As a result, there is also a large body of evidence (e.g. the University of Michigan’s Customer Satisfaction Surveys) that overall customer satisfaction is low and declining in many industries. Not surprisingly, customer loyalty levels are also very low, and most customers feel little long-run loyalty to even preferred suppliers.
Any alternative model, such as the automation of consumption, must be highly efficient in its use of all resources, not just time. It must also be built on a high level of mutual trust and respect, and the nearly-complete absence of opportunistic action by both sides.
Mutual Trust and Respect. The automation of consumption requires that there exist a high level of mutual trust and respect between customers and marketers. Without trust, both sides will withhold information and access that is essential to value-creation. Especially early in a customer relationship, it is extremely important that the marketer strive for “zero defects. This requires investment in capable and reliable information systems, with enough built-in redundancy to ensure that customers get exactly (or more than) what they were promised and what they expect. Once a high level of trust is established, customers will develop a degree of tolerance for occasional, unavoidable lapses in service quality. However, marketers must put in place a “recovery strategy” to deal with these lapses, so that they do not lose the customer but in fact establish an even high level of trust. Respect is another important dimension that is almost completely lacking in most marketer-customer relationships. As legendary advertising pioneer David Ogilvy said, “The consumer is not a moron; she is your wife.” Unfortunately, few companies show evidence that they respect their customers, and even fewer customers respect the companies they do business with (let alone admire or feel affection for them). Yet, without mutual respect, a beneficial long-term relationship is unlikely to result.
Mutual Learning and Authenticity: Marketers and consumers both have to invest the time and effort needed to increase their knowledge about each other. Training classes for consumers may become commonplace, as they are for business customers today. Ultimately, if customer relationships are to be long, strong and productive, marketing will need to become humanistically competent as well as technically competent Consumers want relationships with providers that are authentic and empathetic, a need that grows more important with age. If the promise is the attention of a personal relationship, but the delivery is impersonal, customers will have a hard time feeling human presence in the relationship and the marketers will be back in the era of transaction marketing and non- existed “average” consumers.
Ethical Behavior: With the automation of consumption, there may be many possibilities for unethical opportunistic action on both sides that would violate and ultimately destroy the trust between customers and companies. The customer surrenders the right to make ongoing choices, to verify the accuracy of shipments, to ensure pricing fairness. Companies invest upfront for benefits that they expect to receive later. It is an easy but myopic step for either side to take advantage of this for short-term gain.
High Tech — High Touch Customization and Personalization: Todays customers are increasingly heterogeneous; they do not fit into traditional stereotyped categories, and they certainly do not respond to “mass market” approaches. Marketers must provide customized as well as personalized services to customers. The must also monitor changes in customers’ lives to ensure that their services remain relevant and optimized. Along with the use of self-learning expert systems and sophisticated fulfillment systems, marketers must also ensure that there is a human face to their services. The more technology consumers adopt, the more they look to balance this with countervailing human elements. The “dehumanizing” potential of technology is such that marketers must be very careful. Used correctly, technology can add rather than detract from human value. Consumers in an automated consumption relationship will not “harvest” all of their freed-up time for extra work; much of it will be used for meaningful social interaction (rather than anonymous interaction as happens in a supermarket).
Epistemic Value: Like any relationship, one based on the automation of consumption is subject to maturing and the onset of boredom. If the relationship becomes excessively routinized, it will be taken for granted. Marketers must take the lead in revitalizing and “dematuring” relationships, by understanding consumer variety-seeking behavior. For example, as illustrated in the accompanying scenario, they can inject elements of surprise into the service.
Overcoming Innovation Resistance
Consumers ever, where tend to resist change. It is important to understand the “psychology of resistance” and utilize this knowledge in the development and promotion of innovations such as the automation of consumption. A failure to understand the psychology of innovation resistance has led to the failure of numerous innovations. The two psychological constructs that are most useful in understanding the psychology of innovation resistance are: (a) habit toward an existing practice or behavior, and (b) the perceived risks associated with innovation adoption.
The strength of habit associated with an existing practice or behavior is the single most powerful source of resistance to change. Given entrenched habits, individuals are not likely to voluntarily pay attention to innovation communication or try them out. In fact, the perceptual and cognitive mechanisms of such individuals are geared towards preserving the habit. This is because the typical human tendency is to strive for consistency and maintaining the status quo rather than to continuously search for and embrace new behaviors (the exception is among true innovators, who are more likely to be social deviants and abnormal in their epistemic drive). In other words, the formation and sustenance of habits is much more prevalent than innovativeness among people.
The habit toward an existing practice includes all the behavioral steps involved in the process of selecting, acquiring and using an existing alternative. In consumer behavior, it includes all the behavioral acts associated with shopping (time and place choices), procuring (money and effort choices), and consuming (storage, packaging and serving choices) the product. In other words, habit includes the total behavioral stream as a system rather than just the terminal act.
A second major determinant of innovation resistance is the perception of different risks associated with the adoption of an innovation. There are three major types of risks: (i) aversive physical, social or economic consequences; (ii) performance uncertainty; and (iii) perceived side effects associated with the innovation.
In order to implement major behavioral change as would be required for the automation of consumption, marketers need to devise sophisticated strategies to break existing consumer habits and supplant them with new ones. They also need to alleviate the actual as well as perceived risks associated with moving to this mode of consumption.
The benefits of the automation of consumption can be summed up in Mobil’s phrase in the advertisements for its Speed Pass service: It’s “like buying time without paying for it.” The automation of consumption can work with all kinds of products, including commodities. The key is that the experience must not be commoditized, even though the core products may well be.
Several objections can be raised about what is described here. First, there is concern that a high level of automation will lead to widespread deskilling and dependence on others rather than self-reliance. This is an interesting philosophical issue, but it goes to the heart of this phenomenon: Ricardo’s Theory of Comparative Advantage, which is arguably the basis for much of how our economic life is organized. Clearly, we have already lost skills that our forefathers used to have, but gained new ones.
Second, it is argued that many consumers derive a certain amount of enjoyment and sense of accomplishment by performing these tasks. Clearly, for some consumers, these dimensions are important and will outweigh other factors. However, we suggest that many of these automated activities will come back (or already exist) in the form of hobbies, which people will engage in for pleasure rather than out of necessity.
Finally, there is concern expressed about the likely loss of jobs and a decline in competitive intensity. The creation of new jobs and the substitution of some jobs for others are both central characteristics of a competitive economy. “Creative destruction” is far preferable in the long run to a “job preservation” mind-set, as that can severely impede progress. The likely lowering of competitive intensity can be argued to be a good thing; there is simply too much frenzied competition in many sectors, with huge amounts of resources deployed simply to counter competitive actions, with little benefit to consumers. The automation of consumption could restore some much-needed stability to business relationships.
Clearly, the automation of consumption is a double-edged sword that could hurt as many marketers as it helps. Only those marketers that are able to make a rational, substantive case to the customer will benefit in a big way. In other words, the adoption of this marketing approach will disproportionately benefit companies with superior offerings, and create a near “winner-take-all” situation. Building on mutual learning and beneficial lock- in, those companies will enjoy the benefits of customer loyalty and longevity. With little random switching and chum, they will enjoy more predictable revenue streams. The automation of consumption is akin to what Seth Godin has called “subscription marketing,” wherein customer revenues become a form of annuity. These companies will also be more profitable since they will lower their marketing costs across the board, and will enjoy the benefits of sharper experience curves with individual customers. Over time, companies will learn how to serve these customers more efficiently and effectively, and individual customers will increase their purchases while placing fewer demands on customer service.
Incremental value created must be shared with customers; savvy consumers will demand it. Customers with a high lifetime value to the company will demand and receive special consideration. Currently, investment in customers usually stops after they have become customers, and loyal customers typically subsidize those that are less loyal, as well as the acquisition of new ones. Without being forced, smart companies will proactively invest resources in those relationships with the greatest long-term value.