Why customer focus is overrated

Jan 13 2011 by Martin Koschat Print This Article

There is no shortage of extremely successful companies with business models that critically depend upon a high degree of customer proximity and the ability to generate detailed insights into customers' needs, wants and behaviors – those buying habits and attitudes pivotal in shaping and directing the whole organization. In other words, companies that are customer-centric.

Yet, there are also many successful companies that don't go out of their way for customer proximity. By looking at companies that operate on both ends of the spectrum, it becomes clear that customer centricity is not a virtue.

It is well known that BMW delivers superb engineering. Perhaps less well known is the fact that BMW tightly controls the supply chain downstream by owning most wholesale operations and many of its retail outlets. By doing this, BMW enforces, and ensures, the uniformly high level of service befitting a top luxury brand. At the same time, this proximity to the consumer provides direct and timely insights into consumers' shifting perceptions and tastes.

Nordstrom, a US department store chain, consistently ranks at the top in terms of customer satisfaction surveys. Shopping is made to be a rewarding experience. Nordstrom's personnel is carefully selected and trained to help customers along the path of finding what they want or need and, in the process, identify and present new products they never knew they needed.

Invariably, customers leave a Nordstrom store with more than what they had planned on buying. The level of Nordstrom's customer engagement is in line with the retailer's sales strategy.

In the B2B realm, Orica is a company that grew out of one of many small regional Dynamite Nobel companies. Some 20 years ago the company's management – in the spirit of marketing guru Ted Levitt's famous dictum – speculated that what the customer really wanted was perhaps not 50 pounds of explosives but a 50-foot wide hole.

Out of this insight, the company developed an array of services where Orica – based on an intimate understanding of a client's problems and objectives – takes care of all aspects of the handling, deploying and firing of explosives. Today, Orica is a AU$6 billion company whose management continues to have a blast.

These are just a few examples. And there are many other companies whose success is based on customer centricity, most of which would be well advised to continue their successful strategy of customer focus.

At the same time, however, there are many companies and brands that are very successful with only a minimal amount of customer focus and customer engagement – companies that could not be described as customer centric by any stretch of the imagination.

Just a cursory reading of the annual reports of most major oil companies indicates that these companies worry a lot more about acquiring new oil fields than acquiring new customers or keeping the existing ones. Even though just a tad more customer focus may have helped BP avoid some of its recent PR disasters, all major SP 500 oil companies are, nevertheless, extremely profitable and on this dimension very successful.

So generally, in markets with plentiful demand but limited supply, firms may find it more advisable and profitable to direct the bulk of their attention and resources upstream, so to speak, rather than downstream toward their customers.

Ironically, it is often because of their customer focus that firms choose to become less customer focused, at least in certain market segments. Dow Corning has a proud tradition of active customer engagement, and management sees the company not only as a supplier of chemicals but an active partner in solving its customers' problems.

About 10 years ago, the company realized that many of their customers did not want this level of attention but, instead, preferred a better price. Dow Corning responded by successfully launching its brand Xiameter, which stands for a very clear value proposition around a limited assortment of high quality products, ordered on the internet and distributed in bulk without any service, generally at a very attractive price. With Xiameter, the focus is on the value proposition rather than the customer; customers self-select if they find the value proposition attractive and many do.

So far, the examples are from B2B markets. Could it be that industrial marketing managers just have not received the memo on customer centricity? Consider the case of US retailer Dollar Tree. In its 4,000 stores, overstock is sold at rock bottom prices of less than a dollar per item, hence the name. The assortment is haphazard. The stores are messy and often in locations where nobody wants to be after dark. Yet last year this retailer earned $230 million on $4.6 billion of revenue, an extraordinary feat for a general merchandiser.

Is this the result of customer centricity? Has Dollar Tree's Consumer Insights Department concluded that what some consumers really want are haphazard assortments, displayed in messy stores in questionable neighborhoods? Of course not. Dollar Tree offers a clear value proposition around a very attractive price. Again, customers self-select if they find the value proposition despite the trade-offs it entails attractive and many do.

There are many companies in the consumer space that have developed operational excellence to support clear and simple value propositions, often at a low cost to the customer. Customers self-select if they find the value proposition attractive.

This model has fueled the growth of the German retailers Aldi and Lidl; today, both are among the largest international grocery retailers. It underlies the success of low cost airlines such as easyJet and Ryanair. It also drives the success of ING DIRECT, an internet bank with limited services but attractive interest rates on deposits. In fact, ING DIRECT returns deposits to customers who demand too much attention. Pesky customers who do not understand the value proposition are simply fired!

So, "is customer centricity overrated?" The examples I present highlight successful companies on both ends of the customer centricity spectrum. Companies must focus on their value propositions. Customer centricity is not a generic virtue to which company managements should aspire. It's a strategic choice!

About The Author

Martin Koschat
Martin Koschat

Martin Koschat is Professor of Marketing at Swiss business school, IMD. His expertise focuses on shifting trends in consumer behavior, communication and retail.