Small Business

The Learning Relationship


By Don Peppers and Martha Rogers The following excerpt is taken from Chapter 2 -- "The Real Economy".

The more I teach you about my needs -- provided that you continue to adapt your service or product to meet my evolving specifications -- the less willing I will be to give up my relationship, at least partly because it will mean starting all over with someone else.

This is the essence of what we call a "Learning Relationship" -- a relationship with a customer that gets "smarter and smarter" with every interaction. The Learning Relationship represents the central engine of a one-to-one enterprise strategy. A Learning Relationship is a one-to-one relationship. It is the single unique and distinct characteristic of any CRM program.

Now think about some of the implications:

-- The traditional business organizes and measures itself on a "lateral" basis. The business goes from quarter to quarter, year to year, measuring sales revenue or profit laterally across different business units and the entire enterprise. But when we engage an individual customer in a relationship, the relationship develops longitudinally, through time, with respect to this single customer. It is characteristically different today than it was yesterday, and it evolves more as time goes on.

--The immediate financial goal of a traditional business is to maximize the value of a sales period, by generating more sales or profit during that period, across the whole enterprise. But the immediate financial goal for a relationship manager is to increase the long-term value of the customer relationship, through time -- that is, to maximize the customer's expected lifetime value.

-- The long-term financial goals of the traditional business and the one-to-one enterprise are identical -- to maximize shareholder value. But shareholder value is a future-oriented variable. As such, it is much more closely related to the lifetime values of the customers being served than it is to this year's profit, or even next year's.

-- A traditional business sees success in terms of market penetration, or market share, within each division or product category. A one-to-one enterprise will see success in terms of account development, or share of customer, across all divisions and product categories.

-- A traditional marketing or sales professional will concentrate on finding more customers who want to buy his company's product. But a one-to-one customer relationship manager will ponder how to find more products and services for his customer.

Martha Rogers

These are just a few of the differences between a traditional marketing approach and a one-to-one Learning Relationship approach. To understand the benefits of such an approach for the business, let's turn first to the benefits for the customer.

Obviously, if the more I teach you, the more you adapt your product or service to my needs, then with every interaction your product becomes more valuable -- to me. The product has more economic value to me for two reasons: First, it fits my needs better and so, therefore, it requires less accommodation or compromise on my part. But second, my marginal cost of substitution continues to increase. The more I teach you, the more expensive it will be for me to substitute a competitor's product.

So the first benefit for the enterprise is that customer loyalty will improve. But the second benefit -- really, the "flip side" of customer loyalty -- is that unit margins are likely to improve, as well. The principle reason your margins come under pressure in the first place, even when you keep costs under control, is that your competitors are pricing their products aggressively in order to steal your customers. But if you could predispose a particular customer to want to stay loyal, because his switching cost is higher, then you won't necessarily have to match every last discount encountered in the marketplace. As your product continues to have more value for the customer, it may even be possible to raise your price, over time, to share the benefit of this increased product value.

And there are other benefits to the one-to-one approach that we haven't even factored in yet. First, obviously, there is the "human" factor -- the probability that a customer will simply end up "liking" you more, as the relationship improves and customer satisfaction grows. This is indeed the factor that many CRM consultants focus on first -- delighting the customer, exceeding the customer's expectations, and so forth. But, while likability is certainly something we should all work for, by itself it is neither a necessary nor a sufficient condition to generate loyalty. The world is full of customers who switch from one company they were happy with, to another one they are equally happy with. And if you want an example of a company that customers remain loyal to in spite of the fact that they think the service is bad and don't even "like" dealing with them, you might not have to look further than the relationship you have with your own retail bank.

Don Peppers

Another benefit of building one-to-one Learning Relationships is that it can improve the overall efficiency of a business. It can reduce costs, mostly by cutting out the wasted effort of producing products or services that no one wants. Mass customization works on the basic principle modularizing the production or service delivery process, breaking the process into components, and then digitally combining these components to make a large variety of fully configured products. In this way, the mass customizer can cost-efficiently mass-produce goods and services in lot sizes of one. This means a product can be made to order, rather than built to forecast. So mass customization reduces inventory costs, and this single benefit is often enough to more than offset the cost of producing digitally combinable components. Indeed, cost reduction is one of the principle reasons manufacturing companies consider mass customization technologies in the first place.

To think it through intuitively, what the one-to-one enterprise is really doing is making a product only after a customer for that product has been signed. The company is not building some number of standard products in advance of their expected sales, and hoping that its estimate of overall market demand is correct. Instead, first it has a customer, and then it makes the product for that customer. Once again, therefore, a significant element of friction is removed from the economic system, and in this case it is a cost reduction that can often be dropped directly to the manufacturer's bottom line.

In services, the principles of mass customization usually translate to greater asset productivity. If your company's Web site "remembers" individual customer preferences, then those customers will be able to get what they want more quickly. Ergo, your servers will be able to accommodate more visitors in any given time period. Martha RogersDon PeppersExcerpted from One to One, B2B, Customer Development Strategies for the Business-to-Business World, by Don Peppers and Martha Rogers, PhD. Copyright 2001 by Peppers and Rogers Group. [www.1to1.com] Reprinted with permission of the publisher Doubleday, a division of Random House Inc.


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