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BW Businessworld

Book Extract: Have You Gone Digital Yet?

If you are running a business, then it’s time to figure out how to respond to the demands of the digital world

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You might be tempted at this point to look at what Amazon and other technology companies are doing in this arena and say, “Well, that’s fine for them, but we’re not a technology company. We don’t have to worry about these organizational changes.” But that’s simply not true. Digital technology is moving into every dimension of the business world, and it’s forcing every business to consider how it will respond. Every business is now, in one way or another, a software business.
Take a moment and consider your organization. Picture the product or service you offer. Think about the way it’s made, the way it’s procured, the way your customers buy it, the way your users consume it. Those processes are changing because of digital technology.

Think about the way you sell it. The way you market it. The way your staff is trained. The way you account for it. The way you pay your employees and your suppliers. The way you work with your partners. In every dimension of your business, you are seeing radical change. And the driver of this change is digital technology. Or, more specifically, the change is driven by what your competitors, your customers, your users, and, yes, even your employees are now able to do—and are doing—thanks to this technology.

Understanding How User Behavior Is Changing Industries
In the 1990s Amazon was perhaps the first company to create a major commercial advantage by employing user-generated content. By allowing customers to review products on its site, the company actively engaged in two-way conversations with its customers and provided a material advantage to other shoppers seeking to purchase products on the internet. Accessing this content gave customers a reason to choose Amazon over rival services. But in the past ten years, we’ve seen online reviews and other user-generated content become an overwhelming force of its own. It’s changing industries.

Consider the high end of the cosmetics industry, which has, for years, relied on department store makeup counters as a critical sales channel. These counters fill an important need for customers. Customers can walk into a department store, sit down at the counter, and get valuable advice about the products that are for sale. They can understand which products suit their needs and get instructions from trained professionals about how to use them.

But this channel has been under huge pressure lately: YouTube—once largely the land of cat videos and funny home movies—has been reborn in multiple new ways, among them as an advice channel. You-Tube has been flooded with how-to videos; a recent YouTube search for “makeup” returned nearly 8.5 million videos. And these results cover a huge range of topics—“Makeup Tutorial for Brown Eyes,” “For Beginners,” “For Black Women,” “For Teenagers.” As with anything on the internet, some of these videos are not very good, but others are excellent. In fact, the best producers become stars. According to an industry publication, YouTube users watch more than 120 million beauty videos each day. Perhaps more remarkable, of the beauty content available on the site, the major brands control only 3 percent.

It’s not because the brands haven’t tried to create their own content. It’s because users want to hear from other users. Perhaps the biggest star user is Michelle Phan. With YouTube as her primary platform, Phan has more than eight million subscribers, and more than 1.1 billion views of her 350 makeup tutorial videos. Phan started posting videos to YouTube in 2007. In 2010, makeup giant Lancôme began sponsoring Phan’s videos and made her its “official video makeup artist.” Even more impressive was Phan’s 2013 partnership with Lancôme’s parent company, L’Oreal, which created a new product line called “em by Michelle Phan.”

Brands as well as retailers are feeling the impact of user-generated online content. According to a recent report on the sector by Ernst & Young, “Growth, profitability and customer loyalty to a brand will be difficult to sustain. The new generation of connected customers, with instant access to globally transparent pricing, product comparisons and the opinions of luxury-bloggers, will make it more challenging to justify and sustain the high pricing differentials crucial to a luxury strategy.”

Responding to Changes in Consumer Expectations and Consumption Patterns
As digital services have become mainstream they’ve changed our expectations as consumers. If we need to know something, we Google it. If we need to get somewhere, we Uber it. Need a change from stale hotels in a foreign city? Airbnb it. If we need to buy something, Amazon can have it at our door in two days or, in some cities, within the hour. We consult experts like Michelle Phan via YouTube, Twitter, and Pinterest. Oh, and all of these services and products are available to us wherever we are, whenever we request them, via the cool blue glow of our smartphone screens.

Why are these services winning? It’s because they’re offering customers the value they seek, in a way that is deeply responsive to their needs. The technology, handled correctly, is so malleable that it allows service providers and content creators to not only offer service but also adjust it in nearly real time to the way customers are using the service, the demand they’re generating, and the feedback they’re creating.

This is a pivotal moment in the way we approach our interactions with our customers. The same technology that powers continuous learning in our organizations drives the real-time interactions our customers are coming to expect from our companies. If we don’t respond by meeting their expectations, they will tap their way to another provider in less time than it takes to say iPhone.

Learning the Nespresso Lesson
We saw this new era of customer expectations demonstrated recently, when management legend Tom Peters took to Twitter to share his frustration with his new Nespresso coffee pod machine. As his 127,000 Twitter followers looked on, Peters went on a multitweet rant to complain about his frustrations with the product and service.

First, he tried to register the machine, a gift from his wife. (We felt a little bad for her, too.) Peters tweeted as follows.

Boo! Hiss! Pathetic! Registering my new Nespresso machine harder than registering a car in MA
Five hours later, still frustrated, Peters continued.

Nespresso registration tried again w/more info than would give CIA for security clearance. These folks truly are insanely awful/ suckworthy.

Three more hours later, Peters challenged his followers to a wager.

Up for $1000 bet? I bet $1k that CEO of Nestle has never used his company’s website to execute a practical customer task.

The futile attempts of Nespresso’s customer service Twitter team to assuage Peters’s concerns, once a private matter between customer and company, were no longer private. They were playing out on Twitter, and the whole internet was watching. And to make matters worse, the story was picked up by the media and caused the company even more embarrassment.

Seeing Problems as Opportunities
It doesn’t have to be this way. If you’re listening to customers’ feedback and watching their interactions with your service, you are in a position to turn points of friction into valuable new customer interactions—before a famous pundit notices and takes you down in public. Take, for example, this small story from Spotify, an online music-streaming service.

Spotify had a quirk in the way its service worked. Only one instance of an account could be streaming music at any given time. If you listened to Spotify on your computer and then started listening on your phone, it would cut off the stream to your computer.

This wasn’t a big problem for individual users, but it meant that you couldn’t share your account with your family; for example, they couldn’t listen in the kitchen if you were listening in your car.
Customers complained, and Spotify was able to quantify the size of the problem by looking at service metrics. It was big. But was the problem one user using two devices, or was the problem that people were sharing accounts? The company needed to know more. Without much fanfare, and as part of its twice-monthly app updates, it introduced a feature that warned customers when another device was about to interrupt their stream and gave them the option to choose the next step. This change improved the customer experience, but it did more than that. It gave Spotify a new data collection (sensing) opportunity. Based in part on this new insight, it was able to observe the data and collect evidence to allow it to offer a new service: a “family” plan that, in exchange for a slightly higher monthly rate, allows concurrent streaming to members of the same household.

Responding to Customers: You’re in the Software Business Now

These stories demonstrate two important concepts. The Spotify story demonstrates that if you understand what your customers are trying to do, you can probably find a way to create a valuable service for them—one they are willing to pay for. Nespresso’s story illustrates our second concept: even tried and true business models like Nespresso’s (sell the coffee machine and then continue to make money by selling customers the coffee pods the machine requires) are now multichannel services. Nespresso customers buy their coffee pod refills online, so guess what? Nespresso is in the software business.

It’s not enough to have great machines that look good and make delicious coffee. Nespresso has to get that service right, too.