StratChat 18 February 2021: Who is the customer?

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StratChat is conducted under Chatham House Rules. Consequently, the summary below is presented without any attribution of who said what. As such, it is an agglomerate of views - not necessarily just those of the writer or indeed of any one individual.

On 18 February 2021, we talked about The Customer.

Knowing who your customer is is one of the most fundamental questions in business and strategy.

But many organisations struggle to agree on exactly who their customer is.

Customer discovery

Many startups go through a process of customer discovery. For example, one startup started out thinking that the individual employee was their customer. But few individual employees signed up. Then they targeted the employers. This was more successful, but still not enough. Eventually, they found success by targeting payroll providers. A key to their success was the realisation that what mattered to payroll providers was ease of systems integration. This is something that would not have featured on employees radars at all.

This process of customer discovery led the organisation through 2 successful pivots.

It also highlights how the customer landscape changes over time. In this instance, the development of APIs and ecosystems changed the role and importance of payroll providers for this startup. Had it started up 10 years ago, its strategy would have been different, if it would have succeeded at all.

Value Chains

Organisations exist within value chains. Some of the links within a value chain exist with the organisation, whilst others rely on third parties, like supplier and distributors.

Each link in a value chain could be said to have its own customers. As a result:

  1. A department or division within an organisation could have a customer which is another department or division within the same organisation.
  2. At the same time, the organisation could have a customer who is a third-party partner, such as a distributor or other ecosystem partner.
  3. Finally, the organisation also has the final end-user of the product.

This presents three (or more) tiers of 'customer'. In each tier, there could be multiple different segments. Each segment within each tier could have different needs, and therefore require different marketing, sales and fulfilment processes. In all but the simplest of situation, the customer landscape can become complicated very quickly.

The further back you are in the value chain the more complicated it gets. With more intermediate customers between you and the end customer:

  • it becomes harder to stay connected to what the end customer really wants, and
  • you have more intermediate customers whose needs you also need to satisfy.

Vertical Integration

One of the original objectives of Porter's Value Chain model was to help organisations to decide which links in the value chain they would operate and for which they would rely on third parties such as suppliers or distributors.

The term 'vertical integration' indicates the extent to which different stages within the value chain are combined within a single organisation.

As industries evolve, the optimal amount of vertical integration changes. The development of APIs and ecosystems is opening up new possibilities for collaboration between organisations. In many industries, this is leading to:

  1. increased specialisation,
  2. a decrease in vertical integration/increase in the number of different organisations in the value chain, and
  3. greater economies of scale for each of the players within their specialisation.

The Business Model Canvas represents third-party distributors as channels. In simple situations this is OK. In more complex situations, it is possible to string multiple Business Model Canvases together to show how the broader ecosystem might function.

An international perspective

Knowing your customer can become more difficult if you operate internationally.

Local perspectives can subtly change exactly what customers want and why.

Local laws and regulations can significantly change exactly what you can offer them and how.

Stakeholders

It's tempting to say that, in for-profit organisations, only the person who pays you is the customer, whilst everyone else is a stakeholder.

In non-profits, like charities, this does not hold. There it is more useful to talk about donors and beneficiaries. Perhaps these organisations don't have customers at all?

For internal service providers, organisations sometimes use "wooden dollars" to allow internal departments to charge each other for products and services. But this is not without challenges.

For example, a sales representative asked his IT department to 'rent' a piece of equipment needed for an important sales meeting with an external client. He was told that the equipment was not available because it had already been rented to another department for an internal meeting. On suggesting that a meeting with a customer should take precedence over an internal meeting, the IT Help Desk told the sales rep: "you're all our customers". The sales meeting had to be postponed, putting the revenue at risk. 

Is this simply a problem of poor policy, or is the notion of internal customers inherently bad? Should anyone not paying you real money be called a stakeholder, and not a customer?

This leads to a further distinction between:

  • who makes the purchase decision,
  • who pays for the product/service,
  • who actually uses/benefits from the product/service.

In the case of Facebook, for example, we could consider two types of 'customers': the people who advertise, and users who social network with their friends and family. Clearly, it is the advertises that pay, but they do so only because the users choose and use the platform.

Then there are multi-sided markets, where organisations match two or more customer groups with each other. For example, eBay matches buyers with sellers. These are described by Evans and Schmalensee in their book Matchmakers: the new economics of multisided platforms.

When selling software to financial services clients, there is:

  1. the economic buyer (who writes the cheque)
  2. the user
  3. the internal compliance department
  4. the regulator

all of these can influence the sale. All must be satisfied.

The world is becoming more complex. New business models are emerging. The distinctions between different types of clients and other stakeholders are becoming more difficult. Would we be better off if, instead of clinging to these distinctions, we simply focused on and prioritised the needs of all stakeholders?

When your customers want something different every time

Business processes exist on a continuum which can be described as (source):

  1. Continuous processes
  2. Assembly line
  3. Batch process
  4. Job shop
  5. Project

The consideration of the customer is different across this continuum. For example, in continuous processes, all customer must want more or less the identical output. You get what comes out. But in projects, each project is tailored to each customer's specific requirements.

For continuous processes, the customers' needs must be understood mostly in terms of what is produced. When understanding customers and their requirements for projects it becomes more about how the project is delivered.

Over time, work that was previously done a projects becomes more standardised and repeatable. Agile, for example, attempts to move aspects of software development from purely bespoke projects into repeatable processes like Sprints and Scrums.

Conclusion

Knowing who your customers and other stakeholders are is not always trivial. There are many complexities. Balancing them all out in your strategy and operating model can be complex. But it is vital to your success.


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