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Communications of the ACM

The Challenge of 'Customerization' in Financial Services


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The financial world is becoming personal. Sites such as My E-Loan, MySchwab, MyCiti, MyFinances (Quicken.com) are promising customized interfaces tailored to your personal needs. The old days when a small-town banker knew every customer who walked through the door are being re-created and improved on a much larger scale in the virtual world. How many traditional bankers would handle your account at 2 A.M. or give you nearly instant approval on a loan application? Today you can track your stock portfolio, monitor financial news, check account balances, pay bills, and apply for mortgages online. But as much as these new custtomized Web sites are seen as a great leap forward in both efficiency and customer service, they are mostly window dressing. There is the potential to do much more to truly create and manage a customized experience for customers in both the customer interface and the product and service offeringsthis is the potential of what is called "customerization."

Financial services is just one of many industries experiencing this trend toward customerization, which is a combination of the customization of the operations and customization of the marketing and customer relationship. The first aspectmass customizationhas virtually eliminated the tradeoff between tailoring and expense that was central to mass production. When Henry Ford said his customers could have any color they wanted as long as it was black, this founding father of mass production was describing the central tradeoff that defined manufacturing until recently. Standardized products could be produced far more cheaply and quickly than individually tailored work. Customized products were more expensive and took longer to receive. So customers had to choose between customized but high cost and slow delivery products and services, and standardized cheaper off-the-shelf products and services. The emergence of computer-managed, flexible manufacturing techniques has narrowed the gap between customization and efficient production, even for products such as automobiles. Now, configuring whole products from scratch is extremely fast and inexpensive. Many companies offer highly customized products in a wide range of categories, including computers, sneakers, vitamins, cars, golf clubs, eyeglasses, garden design, cosmetics, and greeting cards.

For digital products such as music, books, and financial services, this configuration is even less costly. When creating customized products doesn't require reshaping steel but rather pushing around electrons or photons, the ability to customize cheaply is even greater. You can give customers whatever they want in countless variations they help to design. Yet few financial institutions take advantage of this opportunity.

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The Next Level: Customerization

Customizing the product is just part of the possibilities opened by the new technology. The entire marketing process can be customized. Some companies are doing more than catering to new markets or delivering custom-made products at lower prices; they are transforming the practice of marketing from being seller-centric to being buyer-centric. This is customerization. Companies, such as priceline.com and DealTime.com have customized the price determination process, letting customers specify their own prices, and then searching for providers willing to sell at those prices. Companies such as Dell have established custom Web sites (called premier pages) for their business customers, whose employees can then order computer configurations pre-approved by their companies.

Customerization encompasses more than mass customization of products, and companies excelling at customerization need not manufacture anything. Consider garden.com,1 which is transforming the nursery industry. Nursery customers typically go to a local store, where they are presented with a selection of approximately 200300 plants, which in most cases, must be transported back to the customers' homes. In contrast, garden.com starts this process way up on the value chain. Customers begin with a blank palette or any number of starting formats, such as a Japanese or English garden, and design a garden on their computers, customized to their lot size and local climate (at the level of the zip code). They can select from over 16,000 products and try out various landscaping options before deciding what their garden will be like. The site also contains an encyclopedia of information related to gardening, helpful hints for both amateurs and experts, and editorials, all designed to help customers in their decision process. Once customers design a garden and generate a "bill of goods," Garden.com coordinates the supply chain from its set of over 100 supplier partners and orchestrates the delivery of the products through FedEx, so all items are delivered together. Garden.com does not own any nurseries or take delivery of the plants, that is, it does not own a manufacturing process. Yet this company is able to create a customized product and a unique shopping experience for each customer. Thus, customerization is more than just mass customizationit is a business strategy to recast a company's marketing and customer interfaces to be buyer-centric.

Indeed, customerization can be implemented with little prior information about customers, and the product itself can be manufactured after customers tell the company what they want to buy. For example, priceline.com sells a standardized product (airline seats), but customizes the price determination process, and (currently) requires no a priori information about the background of the individuals. As in the garden.com example, priceline.com can function effectively without any manufacturing facilities, by simply orchestrating the delivery of the chosen products and services.

Both mass customization and customerization are attempts to provide products and services that better match the needs of customersthey are two sides of the same coin. Both are IT-intensive. However, mass customization is IT-intensive on the production side, whereas customerization is IT-intensive on the marketing side. Also, customerization is inherently dependent on Internet and related technologies (particularly the Web) as a vehicle for economically implementing this concept.

Customerization begins with customers and offers them more control in the exchange process. However, companies can still decisively influence customer decision-making and choice processes by framing the choice options and making it easier, more productive, more engaging, and cheaper for customers to deal with them than with competing firms. In fact, customerization is driven by a firm's desire to redefine its relationship with customers. In some sense, a firm becomes an agent of the customer"renting" out to the customers pieces of its manufacturing, logistics, and other resources and allowing them to find, choose, design, and use what they need.

As shown in Figure 1, customerization is a combination of both customized operations and customized marketing. It is distinct from personalized or one-to-one marketing, which focuses primarily on taking standard products and services to customers through customized marketing. It is also distinct from mass customization (the manufacturing of customized products), which offers customized products and services through standardized marketing. The pathway to customerization often runs from one-to-one marketing or mass customization.

Not all companies will move to customerization. Products such as salt, where targeted customers have no need for customized offerings and firms offer standardized products, will probably remain with the traditional mass market approach. At the other extreme are industries such as financial services, where customers desire a high level of customization and the production process allows the customization of the product and service offerings at reasonable costs and speed of delivery. Here, customization can be done by the customer, the firm, or by an intermediary.

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Implications

Customerization challenges everything we take for granted in marketing and marketing-driven business strategy, as summarized in the table here. What does a product line mean when the customer designs the product? What is the role of research and design in these situations? What pricing strategies are appropriate when customers set their own prices for airline tickets, hotels, mortgages, and automobiles? What does segmentation mean when every customer is a segment? A discipline that came of age in an era of mass markets and relied on traditional direct-marketing methods to reach individual customers now has to devise strategies to take advantage of the potential offered by viewing the customer as an active participant in the exchange process and a co-producer of the product and service offerings.

In reviewing these and related customization driven changes, the reader should consider the obvious impact it has on the marketing and business strategies of financial service firms.

From passive to active customers. Traditional marketing often views the customer as a passive participant in the exchange process until the time of the sale. Customerization sees the customer as an active participant at every stage of the product development, purchase and consumption process, and as the co-producer of the product and service offering. Lighting manufacturer Lutron Electronics, for example, has changed its mantra from "What can we do for you?" to "What can you do with us?" This philosophy has helped the company become the worldwide leader in the design, manufacturing, and marketing of residential lighting controls and systems.

Focusing on unarticulated needs. In contrast to the mass-marketing focus on articulated needs as stated by customers, or the marketer's perception of consumers' articulated needs, customerization focuses on both articulated and unarticulated needs by guiding customers through a design and discovery process. Andersen Windows uses a program called Window of Knowledge to allow customers to "see" how various Andersen windows would look when installed in their homes. If a customer wants to install a new bay window in her kitchen, the program illustrates the options inside and outside, including the effect of lighting on the kitchen.

Tailoring the offering. Database marketing offers alternative approaches by which firms can tailor individual offerings and products to increase customer loyalty, dollar volume of purchases, and repeat purchases. Companies can use collaborative filtering to offer recommendations based on past purchases or ask customers for their preferences and tailor the offering to the customer. Peapod, an online grocery store, customerizes the grocery shopping process so that its customers can create lists of everyday and special-occasion puchases. Using this service, customers can greatly reduce shopping time (frequent users can purchase $200 worth of groceries in less than 10 minutes), eliminate product categories of no interest to them, keep running totals of purchases so that they can spend within their budgets, and so forth.

The real world is the laboratory. Instead of accepting off-the-shelf products, customers are creating their own productsfrom customized vitamins, to configuring computers, to building their own CDs. New products no longer come fully formed out of the labs alone, but arise through an interactive process of working directly with the market. Each customized product is a result of a co-design and production process of the customers and the firm. When this process is repeated across a number of customers, new insights emerge about customer preferences. Attributes and offerings that are not attractive can be dropped and those that are frequently requested can be enhanced. Customers are helping many companies to configure a wide range of products on demand, including computers (Dell and others), bicycles (National Bicycle and Cannondale), CDs (CD-Now), vitamins (Acumin), designer jeans (Levi's) and newspapers (Wall Street Journal Personal Journal). Brad Oberwager, founder of Acumin, which offers customized vitamins, says customers stop thinking about the company as a producer of products and begin to view it as a service provider. The service is to give customers access to the manufacturing facilities to design and produce their own products.

The global bazaar. Pricing is becoming more fluid. Online auction sites such as e-Bay and name-your-own price services such as Priceline.com are shifting pricing from something suppliers set for everyone to an attribute customized by the customer. Even before the advent of the online medium, industrial markets and third-world bazaars have long followed a customized pricing mechanism based on bargaining and discount schedules. The online medium has made it feasible to apply flexible pricing more broadly. Online prices can be tailored to specific users and raised or lowered instantly to assess price elasticity. The ability to create truly fluid pricing is only limited by customer acceptance. Technology is now available to vary pricing in ways that were not possible in the past. Such flexible pricing technologies are not limited to the online arena. New in-store technology allows supermarkets to customize pricing based on specific times of the day through digital price labels or even to tailor discounts and coupons to individuals based on their past purchasing patterns. Dell has implemented a highly successful customized pricing mechanism through its premier pages program, setting up password-protected custom Web sites for over 30,000 business customers by extracting the most relevant content from its public sites and then customizing each site with the specific volume-pricing agreement that Dell has concluded with each customer. The system is also designed to take into account the purchasing process and billing procedures specific to each client. Employees of a client firm can configure computer systems and directly obtain a price quote specific to that client.

From broadcast advertising to interactive edutainment. Education is a key part of facilitating customer decision-making, and many companies are beginning to grasp the full significance of providing detailed information and knowledge to enable customers to become sophisticated buyers. Lutron created a display at the Ultimate Home Theater Experience in Innovations at Disney World's Epcot. Millions of visitors directly experienced "the magic of lighting controls," showing them how different lighting can make a room feel larger or smaller, warmer, or colder. When Lutron introduces a new lighting product, its first priority is to educate the trade through public relations, advertising, trade shows, and training sessions. Lutron focuses on communicating these direct customer benefits rather than focusing on individual products, recognizing that customers might be better able to convey the feel or function they want from their lighting system versus simply specifying a particular dimming switch.

Taking distribution off the shelf. Distribution used to necessitate retail shelf space, or in recent years, catalog mailings. However, as more customers go online and become active participants in creating products and services, it becomes critical for firms to offer a direct channel to customers. Of course, this has raised channel conflicts and many other complications for manufacturers who rely heavily on legacy distribution systems. Coordination with companies such as Federal Express enables manufacturers and distributors to move customized products such as vitamins and coffee, or customized assortments of products such as groceries into customers' hands without involving retail stores. Digital products such as financial services, CDs, books, software products, and movies can be distributed electronically, eliminating the need for a separate physical distribution infrastructure, apart from the Internet. For example, Xerox is planning to become a big player in the book business. From a central digital repository, the company hopes to be able to print four-color books on demand in any quantity using specialized printers connected to a network. The interesting aspect of this business is costs are linear for any quantity, allowing a high degree of customization. If only 23 copies of a report are required for a board meeting, exactly that number can be printed at competitive prices.

The consumer name as a brand. Reflect.com gives the consumer not only a customized Web page reflecting the consumer's lifestyle and preferences and customized products reflecting the best R&D responses to those preferences, but also a customized brand nameyour name as the brand. Other efforts to customize the brand while capitalizing on the brand name of the manufacturer, include options such as Dell 4 ME or the numerous products and services for which a domain name beginning with "my" have been reserved. Such "personalized branding" can be extended beyond words: consider the picture postage stamps introduced by Canada Post. This service allows consumers to design stamps with photographs of their choicethemselves, their family, pets, or other personalized images.

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Implications for Financial Services

Customerization is a critical aspect of the emerging new marketing paradigm [1], with enormous implications for a firm's marketing and business strategy. How can financial services firms begin implementing a customerization strategy? Creating online services with "my" extensions is an important first step, but companies must not merely reshuffle the same old offerings, but truly deliver on that implicit promise of a fully customized experience. To do this, companies have to break out of their company-centric mindsets and build their organizations around the needs of the customer. Companies holding the conviction that customerization is the inevitable next development in marketing must be willing to take three critical steps, as discussed here.

Increase the digital content of everything the company does. In particular, the firm should increase the digital content of its offerings, and of the customer's shopping and consumption experiences. Once these are digitized, it becomes easier to customerize. Financial services firms, for example, have already been migrating customers from brick-and-mortar operations to online services. This is a step in the right direction, but much of the early focus has been on efficiency gains (which often haven't been so great given the existing infrastructure has to be maintained). The true focus and evaluation of such moves should be based on how they improve the customer experience. These customer relationships are the source of not temporary gains but long-term profits. The more digital the product, the more easily it can be customized. For digital products, there are innumerable options for customers to choose from and customerization improves the fit between what the customer wants and what the firm can offer profitably. There are also big gains from customerization even in the case of non-digital products. Consider two diverse products: an automobile and a hot cup of cappuccino. We can conceivably digitize some elements of these products or their shopping and consumption experiences. Mercedes-Benz recently introduced an online customizer for building your own E300 Turbo Diesel. The company is trying to digitize parts of the shopping experience. How about a cup of cappuccino? It is conceivable that a cappuccino machine could be designed to take into account the type of coffee beans, type and amount of milk, temperature, and brewing time to customize a cup of cappuccino. The cappuccino machine could become an Internet appliance that downloads the appropriate brewing instructions from the Internet, or is activated remotely over the Internet so the coffee is ready when the customer comes home.

Position the firm to become the customerizer. A major opportunity for companies is the possibility that they could play a central role in digitally focusing the forces of supply and demand to create a new exchange process for customers. To be truly successful at customerization, a company must bring together the value chains of the supply and demand sides of a market. Figure 2 illustrates how Edmunds.com brings together the varied functions performed by the different players in the auto industry and delivers a complete shopping/purchasing experience. Such online intermediaries can also facilitate the ranking of standardized branded products by price as well as quality, or other desired attributes. To the extent that intermediaries are customer-centric and allow the customer to customerize the products and services, customer loyalty may switch from the manufacturer to the electronic intermediary. The travel industry is focused on planes, hotels, and automobiles, but travelers are concerned with vacations and business trips. Companies that can organize around the customer view and allow customers to design their experiences will be more attractive to the market. Similarly, the financial services industry is still organized into separate product offerings (mortgages, credit cards, bank accounts, brokerage accounts) but the customer is interested in financial wellness solutions. Typically, customers turn to many different financial institutions for different services. Customers are achieving some level of customization but only after spending extensive time and energy, evaluating and juggling numerous offerings from different companies. While regulations sometimes are the culprit, the problem often is an industry-centric view (focusing on a particular product offering) rather than a customer-centric view. As a financial services company, how can you give customers more customized and integrated options? How can you make their lives easier? This market is in need of a customerizer.

Integrate the old with the new. As we explore the dynamics of customerization, it is important to understand that customerization, mass customization, personalization, and standardization will exist side-by-side. The rise of the Internet does not replace standard broadcast advertising, but rather creates new two-way channels for interactively communicating with customers. Customerization is not a strategy to replace traditional mass marketing; rather it offers additional competitive options to develop an overall marketing strategy. The challenge facing the firm is how to design and manage a customerization process along with mass-produced products and services. In some sense, this process is easier for companies built from the ground up as e-businesses (for example, Amazon.com or the Internet bank Wingspan) than for well-established companies with considerable investments in legacy systems and processes such as General Motors Corporation. Decisions about where and when to customerize and integrate this strategy with other marketing strategies is one of the most critical challenges facing management. It is not enough to recognize the existence of customerization, or to know how to do it well. Managers must determine the optimal portfolio of mass marketing, direct marketing to target segments, and interactive customized marketing at each step of the business cycle.

Customerization raises a number of challenges including issues related to customer privacy, the identification of the intangible factors that can make or break an offering, enhanced customer expectations, the need for limiting the complexity of options, pricing issues related to customized offerings, and the required changes to the entire marketing and business strategy of the firm. But the long-term payoffs from lifelong relationships with customers and focus on maximizing the lifetime value of the customers are well worth the effort.

Customerization offers tremendous opportunities for building companies and gaining strategic advantage. The current turmoil in the computer industry, with Dell setting new standards for customerization, suggests companies that do not adopt this concept are at a competitive risk. Where are the companies in financial services that will take up this challenge? Will one of the large players recognize this opportunity, or is there another Michael Dell sitting in a college dorm waiting to sweep in to customerize the industry?

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References

1. Wind, J. and Mahajan, V. Digital marketing. The European Business Forum 1, 1 (2000); www.ebfonline.com.

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Author

Yoram (Jerry) Wind (windj@wharton.upenn.edu) is the Lauder Professor of Marketing, Director of the SEI Center for Advanced Studies in Management, and Director of the Wharton Fellows in E-Business Program, The Wharton School, at the University of Pennsylvania.

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Footnotes

This article is based in part on "Customerization: The next revolution in mass customization," an article that appeared in the Winter 2001 issue of the Journal of Interactive Marketing.

1Since writing this article, garden.com has gone out of business. The concept of cus-tomerization underlying the business, however, is still viable and of interest and value to a significant segment of consumers.

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Figures

F1Figure 1. Pathways to customerization.

F2Figure 2. Customerization in the auto industry: Edmunds.com.

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Tables

T1Table 1. The changing face of marketing.

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©2001 ACM  0002-0782/01/0600  $5.00

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