As originally published on LinkedIn Pulse
The roller coaster that is 2020 has taught us to adapt. In our work and personal lives, we are being forced to modernize the way we approach things.
For businesses, the most powerful forces driving change are the shifts in customer habits and their new expectations of experience. Whether out of preference or necessity, customers are changing how they buy, when they buy, where they buy and why they buy. Companies are scrambling to keep up and deliver a customer experience that accounts for all those variables in a way that is at least somewhat viable.
The structure of most industries is not set up to meet those shifting customer needs. The notion of a “value chain” in the business landscape has served as a platform for how products are brought to market for generations.
Companies need to shift from thinking about a value chain to an “experience chain” so they can better serve the demands of the modern consumer.
The value chain is about products, and that is where the problems with the model start. We find ourselves in 2020 and the age of customer experience is upon us. The concept isn’t new, as the idea of the experience economy was introduced in 1998. This is the idea that companies are no longer selling products. They are delivering an experience that builds value around the physical product that makes it a more enticing choice for the customer.
That concept of choice is the key driver on the consumer side. They have nearly infinite choice for just about any product they could ever want or need. Overwhelming options make it harder for consumers to distinguish the value of one product compared to another. The experience that wraps the product becomes the differentiator.
Limitations of the Value Chain
It is oversimplified to say that the downfall of the value chain is a focus on products. Beneath that idea are real mechanisms and embedded habits that make the value chain rigid and ill-equipped to adapt.
Misaligned Definition of a Customer – In a value chain, most of the stakeholders have a different definition of who the “customer” is. A manufacturer might sell their products to a dealer or a distributor. They are selling their goods at wholesale to someone they view as their customer. That distributor or dealer will then add a markup to the product so they can make a profit and sell it to their customer. That customer could be a retailer, or possibly even a contractor (depending on the industry). That business then marks up the product again and sells it to an end user (customer, consumer, whatever terminology they use). That final buyer is the person the product was designed for, yet it has passed through all these different players in the chain before reaching them. With everyone in the chain operating with a different definition of a “customer”, industries will struggle to get the chain aligned to deliver a value-added experience.
Misaligned Incentives – The lack of a common definition of a customer sets up a series of misaligned rewards and incentives in a value chain. This creates a unique dynamic between various players in the chain that can be adversarial. Every party is trying to get the best deal they can for themselves. They haggle over pennies per unit to drive a better profit margin for their company. In a value chain, the players involved have incentive to extract value during the process, not add it. That is not to say that companies don’t find other ways to invest in the success of one another’s business, but it is usually tied to how much product you are selling. The incentives in the value chain aren’t tied to making the end customer happy.
Misaligned Responsibility for the Experience –In the current structure, the only business in the chain that has any incentive to worry about the end-user experience is the business at the end of the chain. This could be the retailer or contractor mentioned above (or a host of other types of providers). Since they are the one directly serving the customer, customer experience becomes their responsibility. All the other links in the chain believe they have done their part. They sold a product at a price their value chain partner was willing to pay and they delivered it to them. Once that exchange happens, there is little incentive for the businesses in the chain that are upstream from the end customer to really care. That leaves the last link, which can vary from major retail chains to independent local businesspeople, to develop and deliver a customer experience on their own. They need to in order to stay viable and competitive. Everyone’s success in the value chain depends upon the ability of that last link in the chain to service that customer, but they are not doing enough to help drive the experience.
The value chains have been conditioned to take their direction from the people making the products, rather than the people buying them. In theory, the companies making the products are creating them with the end user in mind. However, that model assumes that creating good products is enough to win customers.
It isn’t enough anymore. The model needs to change, and entire industries need to align around a new concept – delivering an experience around the product.
Not every industry can become Warby Parker or Casper Mattress overnight, so I will follow this article with a series of posts about the “Experience Chain.” My hope is to help companies and industries learn how to collaborate to build value into the modern customer’s journey.