Convergence Marketing: Strategies for Reaching the New Hybrid Consumer

Description

Today's consumer is a centaur: a new hybrid who's mastering the latest technologies, but is still driven by age-old human desires and motivations. "Cyberconsumer" business models ignored human reality: that's why they failed. But "back-to-basics" ignores the deep changes the Internet has wrought. The genie's out of the bottle: your customers have profoundly new expectations -- and you have powerful new tools for delivering on them. Convergence Marketing Strategy illuminates the "centaur," showing what today's customers can do, what they're choosing to do, how they're evolving, and where they're headed. Jerry Wind and Vijay Mahajan identify "5Cs" at the heart of the new consumer relationship: customerization, community, channels, competitive value propositions, and choice tools. You'll discover strategies and tactics for responding right now -- and a complete framework for refocusing processes, structure, people, incentives, and technology to serve the centaur tomorrow.

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Designing a More Successful Organization

Table of Contents

Foreword.


Preface.


Acknowledgments.

I. UNDERSTANDING THE CENTAUR.

II. NAVIGATING THE FIVE CS OF CONVERGENCE.

III. MASTERING CONVERGENCE MARKETING.

IV. TRANSFORMING THE ORGANIZATION.

Preface

Preface: Running with the Centaur

"A businessman is a hybrid of a dancer and a calculator."

—Paul Valery, French Poet and Philosopher

The Internet revolution didn't turn out to be anything like we thought it would be. At the end of the 1990s, the discussion of many observers, we among them, focused on the rise of the "cyberconsumer" and the emergence of "Internet marketing." At the extreme, the image of this cyberconsumer was humorously caricatured in a series of Sprint commercials introducing its wireless web, in which people hunched over their computers in dark rooms were invited at long last to step out into the sunlit world. The business model designed for the cyberconsumer was the "pure play" Internet firm, either a separate dot-com or a stand-alone division of a larger company. But the cyberconsumer was largely a myth. Consumers didn't behave anything like we thought they would.

Today, we are entering the age of the centaur. Consumers act across multiple channels. They combine timeless human needs and behaviors with new online activities. They are like the centaur of Greek mythology--half human and half horse—running with the rapid feet of new technology, yet carrying the same ancient and unpredictable human heart. This consumer is a combination of traditional and cyber, rational and emotional, wired and physical. This consumer is not either/or, but both.

The authors came to this center from opposite directions. Jerry Wind was an early champion of digital marketing, highlighting the revolutionary changes of the Internet on consumer behavior, marketing and business strategy. He urged executives to consider the potential of this new technology to transform their businesses. Vijay Mahajan pointed out that not everything had changed, and that many aspects of consumer behavior and marketing remained the same. He urged executives to consider the enduring human characteristics that would continue to shape marketing and business strategy. As we discussed the issue from these two viewpoints, working on a series of projects that led to this book, we came to the conclusion that we were both right: the reality was the hybrid consumer.

This is not to suggest that there are three separate segments (traditional, cyberconsumer and centaur). The reality is convergence. The entire market is becoming centaurs, either directly or indirectly (even if someone is not online, their behavior will still be affected by new technologies, channels and products, and service offerings). This is why we focus so much on the centaur. The centaurs, in turn, are heterogeneous, so there will be many segments among these hybrid consumers.

Even the most tech savvy of U.S. consumers—the 18 to 25 year olds of Generation Y—are not strictly cyberconsumers. A recent survey of more than 600 Gen-Y respondents (51 percent of whom had made online purchases in the past year) found that nearly 40 percent learned about the product online, but bought at a physical store, whereas only 9.3 percent began and ended their search online. When asked where they would prefer to shop, nearly three-quarters chose a store rather than online. Across the spectrum, consumers are combining various channels and approaches, searching online to buy offline, searching offline to buy online—and everything in between. Charles Schwab found that while about 90 percent of all trades are handled online, 60-70 percent of new accounts are set up in branch offices. People want to be able to see whom they are working with when they turn over their money.

Benefits of Convergence

The power of hybrid models can be seen in the success of Tesco, which raced past pioneers such as Peapod and Webvan to become the largest online grocer in the world. Tesco, using its century-old platform of retail stores in the U.K. as the launching pad for its online service, created a profitable online business that was handling 70,000 orders per week by mid 2001 and had racked up more than $400 million in sales the year before. Tesco could set up its online grocery business for a fraction of the investment of Webvan because it was able to build off its existing infrastructure. Tesco has moved into the U.S. market, purchasing a 35 percent investment in Safeway's online grocery service in June 2001, and announcing plans for expansion into South Korea.

The power and profit of the hybrid model can also be seen in the success of Staples.com, which expected to grow online revenues to $1 billion in 2001, nearly 10 percent of company sales. Even more significant, Staples found that the addition of the new channel is not cannibalistic, but synergistic. Overall, customers who shop in the store and catalog spend twice as much as those who shop in the store alone, and customers that shop using the store, catalog, and online channels spend an average of $2,500, nearly four times as much as store shoppers.

The results achieved by Staples and other firms offer a sense of the potential return on investment from meeting the centaur. Convergence strategies offer a variety of opportunities for generating new revenues, reducing costs and creating valuable options for the future.

Changing Mind Sets

There is emerging evidence of the immediate benefits of convergence strategies, if investments are made strategically, but these short-term gains are not the only opportunity. Our focus is to look at the opportunities, both short- and long-term, created by the emergence of the hybrid consumer and how companies can capitalize on these opportunities. The last category may be the most important: the options that convergence strategies create for the future. This book takes a broader view of the strategic impact of the centaur for marketing and business strategy, and the architecture of the organization.

If you believe, as we do, that the centaur is the future of our markets, then the ability to succeed in the future depends on understanding and "running with" the centaur. Failure to understand these changes creates the risk of significant lost opportunities. What can the integration of the offline marketplace and the online marketspace do for consumers that neither can do alone? What business principles will guide the integration? How is marketing changing? How do these shifts affect short-term and long-term profitability and growth?

What Is Converging

Convergence, as we discuss it here, means more than the fusion of different technologies (television, computers, wireless, PDAs) or the combination of channels (such as Tesco's or Staple's bricks-and-clicks model). We focus on a more basic convergence within the consumer—the new possibilities created by the technology and the enduring behaviors of human beings. This convergence will shape how the Internet and other new technologies unfold, and the opportunities created for companies. What can consumers do with the technology that they could not do in the past? When will they continue to do things in the way they always have?

Although most of the focus in this book is on business-to-consumer interactions, many of the insights apply equally to business-to-business strategy. The line between B2B and B2C is already blurring. In an environment in which Sun Microsystems is selling products on eBay, is this B2B or B2C? In an environment in which a customer may soon be able to click an order button for an automobile and set in motion a global supply chain to deliver that car, where does B2C end and B2B begin?

Lessons from the Dot-Coms

This book examines the practices of a variety of companies, but we must stress at the outset that these firms are not held up as ultimate models. They all have something to teach us, but many of the successful companies of a year or two ago are now fighting for their lives. And some companies that were all but written off are back in force. We suspect the same unpredictable dynamic will be seen in the future.

This is a particularly dangerous time to engage in benchmarking or to search for excellence. It is not a time for simple recipes. Instead, it is far more important to gain a deeper understanding of how consumers are changing and how they are remaining the same. The actions of these hybrid consumers will shape the way technology is adopted and, ultimately, the future of your markets.

We should take a balanced view of dot-com failures. Mark Twain once said, "We should be careful to get out of an experience only the wisdom that is in it." Twain gives the example of a cat who sits on a hot stove, and learns not to sit on a hot stove again—but also won't sit on a cold stove. The failures of the first wave of dot-coms offer many lessons about what to do, and what not to do, but we need to be careful in taking lessons from them. Although some of the companies that failed had weak business models, some actually had brilliant marketing strategies and business models. The failure of the business is not necessarily an indictment of the idea. Some may have arrived slightly ahead of their time. Some may have suffered from poor execution. It may be that the time is now right for these ideas to flourish.

During the Internet bubble, we have engaged in one of the most extensive, investor-financed experiments in new business models and paradigms. There has been an explosion of experimentation. Although many of these experiments proved to be unprofitable, many new ideas were developed and tested. Incumbent companies and startups that are still alive can benefit greatly from the acceleration of knowledge from this dot-com "school of hard knocks." Pick through the wreckage and look carefully at what happened. Then take away the lessons that you can use.

The Implications of the Centaur

In this book, we offer insights to top executives and key organizational change agents on the characteristics and behavior of these hybrid centaurs and how we need to reshape our marketing and business strategy to meet them. The book explores different intersections between the consumer, technology and company and their implications for marketing and business strategy and organizational design.

We examine the emergence of the centaur, and the marketing, business and organizational challenges and opportunities created.

Part I offers a portrait of this centaur, what has changed and what remains the same. We also discuss how the focus on the customer has often been lost in the emphasis on technology. These centaurs are complex beings, with a love-hate relationship with the technology, buying books from Amazon.com one day and relaxing in an armchair sipping cappuccino at Barnes & Noble the next.

Part II explores issues at the intersection between the consumer and technology. We consider five key issues at the core of addressing these new hybrid consumers—customerization, communities, channel options, new competitive value propositions, and choice tools. Although these issues have been discussed in the context of the cyberconsumer, they are quite different from the perspective of the centaur. Sometimes consumers want customerization (customized products and services as well as customized marketing), but other times they want to pull standard products off the shelf and receive mass marketing messages. Consumers are members of both physical and virtual communities. The hybrid consumers want to be able—in the words of Fidelity—to "call, click, or visit." They are redefining the traditional sources of value, buying products by auction or fixed price or name-your-own price depending on their mood and purchase situation, creating a new value equation. Finally, the Internet offers powerful tools to find information, make decisions, and manage one's life. These tools empower consumers, changing the way they interact with the company. How can you create convergence strategies to address these interrelated issues?

Part III examines the impact of the centaur on marketing and business strategies. As the consumer connects much more directly to companies, marketing has a deeper role to play. Marketing creates new opportunities for growth and rethinking the company's offering, pricing and market boundaries. The centaur has also transformed the traditional 4 Ps of marketing, along with strategies for segmentation, positioning, customer relationships, branding, and marketing research.

As these changes send shockwaves through the organization, another type of convergence is called for—in organizational design. Part IV explores some of the fundamental transformations established organizations need to undergo to meet the centaur. To navigate the whitewater rapids of convergence and change, organizations need new organizational architectures. They need to change their architectures, creating a broader "c-change" to facilitate convergence across the organization and its ecosystem.

The overall objective is to suggest a new consumer-centric mental model through which to examine the entire business. The kind of shift we are talking about is what Bill Gates describes in the transformation of Microsoft's original mission of "a PC on every desk" to its current mission to "empower people through great software, any time, any place and on any device." The focus is on the convergence of technology and consumer needs.

This book is designed to be an interactive experience. Each chapter begins with a dialogue representing different viewpoints on convergence. Callouts highlight key convergence questions that you can use to challenge yourself and to assess your company's progress. Finally, the close of every chapter offers an "action memo," a set of illustrative hands-on experiments for exploring and applying convergence strategies. We have found the only way to master these new technologies and strategies is to actually experience them and apply them to your own business. These "action memos" are not intended to be exhaustive or to summarize key themes of the chapter, but represent a starting point for your own experiments. We encourage you to share those experiments with us, and other readers, at the Convergence Marketing Forum (convergencemarketingforum.com).

The Relentless March of the Centaur

As Internet penetration increases—and new technologies emerge—we are seeing a relentless march of these new hybrid centaurs. We cannot judge the potential of the Internet and other technologies by their current primitive level of development. John Hagel, author of Net Gain and Net Worth, says if we compare the Internet to a ballgame, we are still waiting for the national anthem to finish. Michael Nelson, Director of Internet Technology and Strategy at IBM, estimated in 2000 that we were maybe 3 percent of the way into the Internet revolution. He also points out that increased speed of connection, which has been a central focus of attention in the evolution of the Internet, is only a small part of the power of the emerging online world. In addition to raw speed, the fact that the Internet will be always on, everywhere, natural, intelligent, easy, and trusted, will deepen the role of the Internet in our lives.

Nelson compares the development of the Internet to the early days of the electric grid. "The Internet right now is at the light bulb stage," Nelson said. "The light bulb is very useful, but it is only one of thousands of uses of electricity. Similarly, when the next-generation Internet is fully deployed, we will use it in thousands of different ways, many of which we can't even imagine now. It will just be part of everyday life—like electricity or plumbing is today. We'll know we've achieved this when we stop talking about 'going on the Internet.' When you blow dry your hair, you don't talk about 'going on' the electric grid."

There will be naysayers who will use the limitations of the current state of technology as a reason for inaction. Customization is often neither cheap nor simple. Early interfaces with online sites were clunky at best and many home connections remain slow. Throughout this book, we look at the current and future potential of technology and explore how the consumer will interact with it. We won't waste your time giving you a repair manual for a Model T, but instead explore how motor vehicles (particularly newer, more reliable versions) create opportunities for activities such as commerce and family vacations by car. While we must be realistic, we cannot become too mired in the past when the future is so rapidly emerging.

Children of Centaurs: In the Forests of the North

It is clear that we are just getting started with the Internet, and we are even earlier on the learning curve for the new wireless consumers beginning to emerge. Even as businesses are scurrying to absorb the revolution of the Internet, teenagers in Europe and Asia are already shaping the next revolution in mobile communication and commerce. This revolution will play out differently in different parts of the world, and it will probably play out differently than we expect, unless we truly understand the new hybrid consumer. It poses new convergence challenges, but raises the same timeless questions: How will consumers interact with the technology?

Again, this interaction between people and technology will not always be as businesses anticipated. Helsinki teenager Lauri Taehtinen, speaking on a panel of Finnish teenagers at the Wharton Fellows in e-Business Program, said that when he goes out on a Friday night, he doesn't make plans anymore. Instead the 19-year-old goes downtown and starts sending short messages on his mobile phone, pinging his friends to see who's out there. They connect by cell phone and then decide where they want to go for the evening. While companies are excited about developing mobile information services that might help customers identify night clubs or order fast food, Taehtinen and his peers are more interested in connection. In an environment in which virtually every teenager carries a mobile phone (Finnish market penetration of 78 percent means almost every citizen above the age of 10 carries at least one mobile phone), the mobile conversation is continuous and ubiquitous. Among U.K. teens, short messages outnumber phone conversations three to one, and the parallel phenomenon of instant messaging is one of the most popular applications of teenagers on the PC in the United States and other parts of the world.

The very fact that short messages (SMS) are the top application of mobile phones in Finland is, at first, a surprising thing. The handsets, designed for voice, are not friendly to the process of messaging. Users tap out their 160-word messages on numeric keyboards through complex, rapid-fire keystrokes, smart systems, and creative workarounds. With users paying a charge to send each message on most systems, it would seem unlikely that SMS would be a central part of the mobile phone business. But these young centaurs want to communicate, and they don't let the technology get in their way. It was only in the interaction between consumers and technology that that power of short messages became apparent. Just as email has been the killer application of the Internet, mobile technology is being bent to the human desire to communicate and connect.

"People don't want to be entertained," Taehtinen bluntly states. "They don't want information. If you go into Internet cafes, you see people are not reading the news; they are all sending email or chatting online. They are willing to pay for social interaction. People want to belong to something."

Enduring Lessons

While communications and information technology may be ephemeral and uncertain, there are at least two enduring lessons: The first is that the new technologies, as much as their proponents may want them to, do not replace the old. They live side by side, and they converge. The second is that people are complex, retaining the same enduring human needs even as they adapt to new technologies and behaviors. These may seem like fairly obvious, even simplistic, statements. But they have been overlooked more often than recognized in the mad rush to adopt new technology.

These realities have fundamental implications for marketing and business strategy. What they mean is that there needs to be a convergence of the old technology and the new to create a portfolio of technologies and channels. The storefront and catalog don't go away when you add the Internet. And, even more important, there is an interaction between humans and technology that changes both. There is a convergence of old consumer behaviors and new behaviors that affects the trajectory of technology, the strategies for marketing and, ultimately, the design of the business.

More Human

The wonderful thing about our interactions with machines is not in the ways machines can be made to behave in more human ways, but in the way these interactions make it easier for us to see what distinguishes us as humans. The more we move to machine-mediated interactions, the more we see the fundamental and enduring behaviors that are at the core of marketing and business strategy. It is this interaction between man and machine that is changing us, transforming the practice of marketing and our organizations.

In this book, we examine how we need to transform our thinking about the nature of these emerging consumers. We explore how to reach these centaurs and establish long-lasting relationships with them. We look at the ways that they remain the same and the ways that they are fundamentally different in their expectations and behaviors. And we consider how they have irrevocably changed—and continue to change—the theory and practice of marketing, and the design of our organizations.

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