Ep. 39 | Investing in your Customers

This week in the Accelerator: What is the one question you should be asking your customers that will completely change the way you think about your business? Similar in power to Levitt’s famous “What business are you in?” question, this new question, “The Ask” will revolutionize the way you think about customers and their value. This week I interview author Michael Schrage, a Research Fellow at the MIT Center for Digital Business. He explains what “The Ask” is and, why is it so powerful? Along the way he shares examples from Apple, Dyson, McDonalds, the pharmaceutical industry and more who have reaped the benefits of how organizations can and should create value.

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What Most Companies Miss About Customer Lifetime Value

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Allison Hartsoe – 00:01 – This is the Customer Equity Accelerator. If you are a marketing executive who wants to deliver bottom line impact by identifying and connecting with revenue generating customers, then this is the show for you. I’m your host, Allison Hartsoe, CEO of Ambition Data. Each week I bring you the leaders behind the customer centric revolution who share their expert advice. Are you ready to accelerate? Then let’s go!

Welcome everyone. Today’s show is about investing in your customers. To help me discuss this topic as Michael Schrage. Michael is a research fellow at the MIT Center for digital business and the author of several books, including the HBR single ebook, who do you want your customers to become? Michael, welcome to the show.

Michael Schrage – 00:53 – It’s my pleasure. Thank you for having me.

Allison Hartsoe – 00:55 – Tell us a little bit more about your background and how you were inspired to write this book.

Michael Schrage – 01:02 – My academic background, such as behavioral economics and Computer Science, and I’ve always been interested in the impact that technology has on how people behave and how people perceive things. I’ve always been interested in what makes people not just more productive, but what makes people more valuable. And so, if you have an economics background, that’s what drives you to the issue of, of human capital. What makes human capital more valuable, how do you increase your return on human capital? And the classic answer is, you know, you trained people, you educate people, you, you send them to school. Um, I was a little more interested in the skills that people acquire. I was sort of interested in the way that technology transformed what people could do, you know, whether it’s a bicycle and automobile or an airplane or, or a computer or a phone. And, and I was really interested in innovation, you know, all the innovations, how do people come up with innovations and create new value. But if you look over the trajectory of my work over the last 20 years, it’s really shifted from how can people create more valuable innovation to how can innovation create more valuable people.

Allison Hartsoe – 02:25 – That’s a really interesting twist on, um, in a sense, it’s almost like the driver behind innovation has changed.

Michael Schrage – 02:34 – That’s exactly right. You know, my first book was on collaboration, Watson and Crick and Brockton Picasso when Wilbur and Orville Wright and Steve Wasniak and Steve Jobs, but, but when you look at the assassinating as it was to see the way they collaborated to innovate the product, their innovations transformed how people behave. They transformed people’s expectations. They transformed people’s capability. So if you think about it, I, I just really flipped the equation and I became more interested in the human capital component and that means if you’re interested in innovation, the question shifts from how do we come up with better innovations for our customers to, gee, maybe we should innovate our customer instead of transforming what we give our customer.

Michael Schrage – 03:32 – Maybe we should transform the customer and our clients. Maybe innovation isn’t something that’s an exchange between an innovator and a customer. Maybe in innovation is an investment in the creativity, the competence, the human capital of your customers and clients. And that was a galvanizing insight. Now to be sure this did not just pop out of the blue. I was reading books and inspired by folks like Kevin Kelly, who I’d worked with at wired and the old whole earth catalog, you know, he wrote a book called what technology wants and sort of implicit in that or I should say explicit and that is, you know, technology asks you to behave in certain ways, but I wanted to move the needle again, remember economics background, people talking about economics being fair exchange. That’s a transaction, but honestly in the longer term I’m more interested in investments than transactions.

Michael Schrage – 04:36 – And so, by changing the time horizon, by changing the focus of value creation, I realized that the real center of gravity, the real, if you’ll excuse the word, sharepoint, shouldn’t be the innovation itself. It should be the customer. It should be investing in the customer, investing in the client. How do we make our customers and clients more valuable? How do our innovations, how do our offerings, how do our user experience not just make the customer happy in the moment? How does it make the customer and the client more valuable in the longer-term relationship that interested me?

Allison Hartsoe – 05:23 – I love that thinking because in this podcast we often times emphasize that companies tend to be product centric and they tend to think about things in product centric terms and it’s insidious and that it’s in the freezing, it’s in the data, it’s in every way that they look at how they operate, but to be customer centric is oftentimes given lip service and we talk about it as you know, a great thing to do and be customer obsessed and have the customer experience, but it doesn’t usually pan out when it comes to investment because they’re not connecting the equity element of the customer. They’re not necessarily investing in the customer. They’re putting a light skin of customer on what’s product centric activity. In your book, you talk about the ask and I think this question is really pivotal to getting a company to change their thinking at. Can you talk a little bit about the ask and how you’ve seen that applied?

Michael Schrage – 06:29 – Sure. Well, of course the ask is, you know, who do you want your customer to become? That’s a question. It’s not how do you want to delight your customer, which is important. How do you want to satisfy your customer, which is important? How do you want to meet your customers’ needs? Which is important. How do you want to listen to your customer? Oh, all very important. But again, what we’re looking for is something different. I’m, I’m not shy. I’m not hesitant about declaring. I want us to transform the customer. So, I’m going to give you a real world example in regards to the ask. You know, who do you want your customers to become? I worked with an organization that was really a technical organization and you know, they had the classic legacy cultural issue of, you know, customer features, a hit our product has various kinds of features and functions that the customer will appreciate.

Michael Schrage – 07:22 – And after several years they managed to break that mindset and get the engineers and the designers and their marketers to move away from features and functions to what here are the benefits of those features and functions. And we did. And you’re going to roll your eyes, which is why I’m grateful that it’s a podcast. So, I don’t see that you would roll your eyes. I pushed her nice simple, and I want to underscore this cheap, cheap, cheap, cheap way of getting them to alter their thinking in a way that was compatible, not disruptive, compatible with what they were already doing. Awesome. In addition to customer benefit, just simply describe how you expect these benefits to transform or change significantly. Not marginally, significantly change customer behavior significantly changed customer expectations. We have the behavior, we had the expectations and what did they discover? Some of those features and functionality.

Michael Schrage – 08:24 – Well, yeah, they were fine, but the changes were really incremental. No one key. If you’re often incremental changes, it’s kind of tough to command a premium for that. It’s kind of tough to be more distinctive and differentiation in that regard and so simply by playing with the semantics, by insisting that a benefit needs to be linked to a change in behavior and a change in expectation ultimately. Well it was I trying to push them change in customer capabilities, human capital, but that’s the language is really, really, really important to you. As you rightly identified. There’s a world of difference between exchange, you know, putting a skin on something and selling the difference between sales and marketing. There’s a difference between a better transaction and a better investment and we need to change that language because to go to your point, that’s what equity means. Equity isn’t about a transaction. Equity is about you’re put equity in with the expectation and hope that it’s going to be what more valuable six months, 12 months, 24 months, five years down the road.

Allison Hartsoe – 09:41 – I love that because that’s exactly right. You know, it’s the future leaning forward. Thinking out in the book you talk about the key insights of the ask. You know, we, we’ve given a nice summary of it, but there’s really a lot of richness to this question and we’ve started to allude to that, but there were six specific insights that you called out in the book. Can you give us a little bit of a rundown?

Michael Schrage – 10:07 – Well, yes. The six key insights, and I don’t mean to run this down as a list, but let’s think of it as a framework, as a scaffolding for the rest of the conversation. Innovation is an investment in human capital that if you’re an innovator, if you’re an entrepreneur, if you’re a professional service provider, what you’re really saying is your future is dependent on their future. If that’s true, if you buy into that, why wouldn’t you want their future to be better? It’s a win-win kind of situation. Innovation is about designing new customers and clients, not just new products, new services or customer experience. Okay? That’s not to say we’re not going to use products and services and add value to them. It’s that were using those products and services and user experiences as the investment in the customer, so it’s not just an object. It’s not just a service. It’s not just a thing. It’s not just an experience. It’s an investment. You’ve got to think of your innovations. You’ve got to think of your product as investments. What kind of investor are you?

Allison Hartsoe – 11:19 – I love that connection,

Michael Schrage – 11:21 – so customer vision is as important as your organizational or corporate or from vision. Every bloody organization I go into has a vision of the company, what we want to be when we grew up, what the company wants to do. Very, very rarely do I a customer vision. That’s not to say there aren’t values and respecting the customer, but it’s static. What do we want the cut overtime? People change over time. There’s an arc. How does the narrative, the innovative arch trajectory change over time, online customer vision, which is what we want our customers and clients to become with the user experience, what the products and services and experiences we have can do for them? We have to create a user experience trajectory. It’s not just a roadmap or a moment in time. It’s a trajectory. What’s the arc of that trajectory? Now, I do want to break out a little earlier here, something that needs to be discussed. All customers aren’t alike,

Allison Hartsoe – 12:28 – Great.

Allison Hartsoe – 12:30 – right? You know, we live, you know a Joe Pine. Oh, I met at MIT before mass customization was even a gleam in his eyes. It was a song fellow, you know, there’s the personalization trajectories, the customization project, that’s fantastic, but you know, for most organizations is a certain. There are certain characteristics associated with their best customers in terms of cost, revenue, relationship, quality, quantity, and they’re typical or average or quote unquote normal customer. How do you want to invest in your best customers differently than your typical customers? What are your expectations? How do you want to transform these, this different customer is required, different asks, who do you want your best customers to become, is really quite profound, where your different questions and who do you want your average customers, our typical customers to become?

Allison Hartsoe – 13:29 – Let me ask you a clarifying question on that for a minute because we run into this all the time. So, let’s say I as a company, I have six different products and there’s two ways to calculate my best customers. One way is across all products and thinking about them synergistically, but not all companies have synergistic product. Sometimes they really address a different market with a different product and there are limited synergies. A, an example of that might be pharmaceutical, right, where you have different drugs for different, um, for different types of illnesses, but just because I have one illness doesn’t mean you’re going to sell me a product for another illness. Right? And I might not be sick with that. Um, so how important is it to think about the arc of the customer development and you know, what you want your customer to become in the framing of the product versus in the framing of the company?

Michael Schrage – 14:25 – That’s a terrific question. And um, you know, my, my argument is that the smartest thing, the wisest thing for most organizations to do is go from customers in rather than product or company. I think you begin with where, I mean, with all due respect to the, you know, Khalid, a Ck, Ck, k, Prahalad, and Gary Hamel. As important as core competencies are, your core competencies are your customers and your clients core competencies and capabilities matter more. Um, now I’m going to give you a split answer and then I’m going to give you a store. The split answer is I begin with your question during a peritoneal analysis, what are the 20 percent of those products that generate 80 percent of the revenues or desirable outcomes that I like and I flip it, what are the 20 percent of the customers, my super user to generate 80 percent of the value financial innovation stuff that I like.

Michael Schrage – 15:37 – I got them at you. Tell me what the overlap is. You tell me what the overlap between those two things are and I can begin to give you really constructive advice on who you want your customers to become, what kind of capabilities you seek to create with them and for them and how your own internal capabilities and human capital issues and investments needed to change. But if you’re running a business, you need to do that. Dual perico analysis.

Allison Hartsoe – 16:04 – I love that angle.

Michael Schrage – 16:06 – Don’t make the mistake that so many organizations do is they begin with where they are, and they keep themselves on the dynamism and creativity of their people, their colleagues and their customers. But you know, you mentioned Pharma. I’m going to give you a real-world example. I just had a got a book where I have a chapter and we read the chapter because I looked up the chapter over a year ago and it reminded, oh yeah, I actually looked at, so I was working with an OTC Pharma Company and it was an allergy relief company. I’m not going to give the name, it’s an allergy relief and there was an how do we do a better job of quantifying and segmenting the benefits associated with allergy relief, you know, how do we sell to families, how do we get the kids to do it, how do we do it or on allergy relief and this was fine because that’s what the, the FDA, again, it is OTC over the counter, but that was the, the, the claim the medical teams and you know, I’m not doing this to quote unquote sound clever.

Michael Schrage – 17:10 – I’m trying to do this as a way to elucidate the who do you want your customers to become free book and said, so who do you want your customers to be? What we want them to have more leg room. Yes, of course you want to reduce, but what’s the real benefit in that regard? No, they get the read easier. Stop. Who do you want your customers to become? We want our customers to be. People need easier. Does that have to be dependent on allergy relief? Um, actually no. Turns out that this company, I may be giving enough information for people to infer, but you remember those nasal strips where you can put it on your nose. So, you get. Okay, so this was a fairly large company and I said, you know what you should do, you should audit an internal audit and find out all the things that are going on to make breathing easier for older people with emphysema, not allergy related to, to children who have costs and cold.

Michael Schrage – 18:18 – What about joggers? Gee, you know, there are apps you can now do sound recognition. Maybe you should have an APP that has people cough or analyzes your breathing. Okay, now mind your large company, but if you just changed the focus from how do we provide better allergy relief to what are the multiple dimensions of ways to make it possible for people of all shapes, sizes, colors, ages, etcetera, to breathe easier. By the way, now I’m now I’m going to push the envelope, and this is one of the reasons why you don’t give the name. Sometimes people find it difficult to read when they’re nervous. This company happened to have a, a antidepressant would that was not OTC, but the whole notion of all the dimensions of people feeling apprehension and interfering with cheese, should they become involved with meditation.

Michael Schrage – 19:14 – If you think about it, these are questions for now obvious, it’s obvious, but if you are in a highly regulated, siloed business where your medical claims are constrained to what you submit before the FDA kind of have an incentive not to think that way. So, once you begin, do we want our customers to become better allergy relief? You know that kind of constrained to youtube the access of allergies.

Allison Hartsoe – 19:42 – It does, it does.

Michael Schrage – 19:43 – I want to clarify, these are not stupid people, these are not narrow minded people, but these are people for whom their recognition and reward structure there, the very product orientation and focus that you described, the very features and function and price and user experience issues that you described literally and figuratively get in the way of what they’re really trying to do. Ironic, isn’t it?

Allison Hartsoe – 20:16 – It is. We’ve run into that. I know exactly what you mean. In a sense, the org structure itself can be a hurdle because the recognition and reward are oftentimes anchored to that same structure. What did your division do? How much revenue did it generate? Things like that, but it strikes me as a very entrepreneurial question when you ask them to think about the customer in a broader sense. In fact, it, it reminds me a little bit of the way John Doerr talks about looking for big markets and solving big problems.

Michael Schrage – 20:50 – Just forgive me for being a name dropper, but I talked with John Doerr back when I was a young journalist reporter covering Silicon Valley for the Washington Post. I consider John to be a friend. I literally, I’m staring at a copy of this book, measure what matters, which I gave to my wife

Allison Hartsoe – 21:10 – and excellent.

Michael Schrage – 21:12 – I’m a huge John Doerr fan and just to underscore your point, I asked John just to date myself in the 1980s in the 1980s, you know, what kind of companies are you looking for at John? And he looks at me very intently behind his glasses and he says, Michael, when we do it right, we’re not investing in new companies, we’re investing in new industries. Talk about we want to create. And that’s just great companies, great companies that create new industries. Yeah, that’s not a subtle distinction.

Allison Hartsoe – 21:44 – Not at all.

Michael Schrage – 21:47 – You know, these things matter. And by the way, if there’s anybody who understands human capital issues and capability creation issues, that’s a guy like John Oliver and his back when I knew them colleagues at Kleiner Perkins.

Allison Hartsoe – 22:00 – Oh yeah. So, an Intel even before that, he’s got quite a history

Michael Schrage – 22:07 – He does and since you’re calling me in Portland, do you know you had Justin Ratner and Portland had a, you know, Intel labs for a long time doing very interesting super computer look. Um, but, but those days are gone.

Allison Hartsoe – 22:17 – Yes. Yes. Gotcha. Okay. So, I actually, I think we interrupted part of the framework. Let’s circle back on that and then let’s go into a couple more examples because the examples I think really stick the framework. We were talking about the aligning the customer vision with Ux, which is such a rich topic in itself. Are there more pieces to the framework?

Michael Schrage – 22:40 – Well, there were two more that I explicitly discussing the book and you know, we can talk about a couple of others that I’ve, I’ve come across, so developed since then, but one of courses is I’m a great believer in prototyping, rapid prototyping, modeling and simulation and experimentation. And, and you know, when one looks at, again, innovation, oftentimes you are your own best Beta, you are the best person to test something. I think it’s absolutely key that you use your prototypes not just to test the prototype, not just to test the model, but to elicit insight and engagement and interaction with potential customers and clients so that they can inform your next iteration and enhancement. So, are you meeting them need? Yes, but that’s not good enough.

Michael Schrage – 23:37 – Are you gaining insight into who they really want to become, who they really wanted to come, so who did that arguably better than anyone else. Clearly a Steve Jobs did that remarkably in industry after industry. Reed Hastings at Netflix, fantastic trucks, Brin and Page for Google. Who Do you want your customers? These are people who understood not just how to do a technical experiment and test and design the prototype, but how to do the kind of, let’s call it, let’s create a phrase, intuitive, excellent. They were able to learn from the first and second version of a design in a way that proves transformative. You know, with all due respect to Steve, who I knew again from the Washington Post and Johnny, I knew less well, you know, in the, in, in, in jobs as second iteration, pun intended, at Apple, the iPhone now is radically, radically different than the first generation.

Michael Schrage – 24:47 – Yes, the core concepts, but note that the notion of an APP, all of these things, the notion that who do you want your customers to become? Not Somebody who just use the phone. Somebody who would use a device to do whatever computing can mean. In fact, the iPhone wasn’t just a device. It’s what? It’s a platform. How do you know it’s a platform? Because people to it. People didn’t do that with a Nokia phone or a black berry. Not that those weren’t excellent clinical devices. They would network devices that work.

Allison Hartsoe – 25:23 – It’s a different paradigm.

Michael Schrage – 25:25 – Exactly, and that’s where we can use the p word legitimately.

Allison Hartsoe – 25:28 – Now I want to push on this just a little bit because we’re using customers in the, um, in the holistic sense, but I think there’s also a very sharp degree of heterogeneity in here. When you’re asking or you’re getting feedback from your customers, do you feel it’s important to look at that feedback with the Lens of equity? In other words, who’s my high value customer? Who’s my medium value customer? Who’s my low value customer? Or can that take you down the wrong path?

Michael Schrage – 25:59 – I’m going to give you a cop out answer and then a serious. The cop out answer is I can’t predict the future. I don’t know, particularly with disruptive innovations who could know the advantage of incrementalism is almost by definition, it should be more predictive than something that’s disruptive than something that is

Allison Hartsoe – 26:21 – because it’s nimble.

Michael Schrage – 26:22 – No, no, no. Because. Because the paradigm really forces people to think that you, you, you, you know, you think that something is a good idea until you realize it’s not a good idea. And this sort of ties into the dark side of the ask. You know, the example I use on the dark side, and we’ll come back to this, but the example I use on the dark side of the ask is one of the most successful innovations in the history of food, you know, which is, which is a supersizing and McDonald’s, that was one of the most profitable things that McDonald’s ever did. Supersizing, you know, for a small McDonald’s could sell more stuff to manage inventory, better inventory, turn better, give customers a better value, and like 70 percent of what they charged was pure profit. The downside is they got labeled not unjustly on the whole childhood and adulthood, obesity and bad nutrition. So here you had a brilliant innovation, brilliant by any economic financial measure. It was awesome, awesome. And they had the stock price to prove it, but when you looked at what the supersizing asks your customers to become. Yeah, well you know, if you want to put a nice gloss on it for

Allison Hartsoe – 27:40 – Ask the customer to become

Michael Schrage – 27:40 – that’s nice. Gloss on it. Fat and unhealthy.

Allison Hartsoe – 27:43 – Yes, yes. A very dangerous side of the dark side of the ask. Exactly.

Michael Schrage – 27:49 – We. We can do this with Facebook. Sharing and connecting with friends, violating one’s own privacy. The privacy of one’s friends, you know, becoming obsessive to the point of narcissistic or exhibitionistic, orange, collusive or stocking, you know, no one has to be careful about scaling pathologies or dysfunctions in ways that are simply unfair, but it is intellectually dishonest, which I do not like to be. It is intellectually dishonest to believe that innovations are all benefits and minimal cost. Just not true. When we iterate and improve something, oftentimes we improve things as much by reducing its dark side as by enhancing its upside.

Allison Hartsoe – 28:39 – That’s very insightful. Do you think these companies didn’t really frame what they were doing around the ask in the first place, so they didn’t see the dark side, or did they see it and just not pay attention to it?

Michael Schrage – 28:53 – I am leading the witness question. I cannot be in there in their mind’s eye. I think if you are running a, a cigarette company, you know, there are certain kinds of inferences that are very, very difficult to avoid after 15 or 20 years, if you will name names. If you’re coca cola or Pepsi Cola and you’re looking at how people consume, and you know, you saw what happened just to give the illusion of continuity here with McDonald’s and you see you’re a carbonated beverage associated with certain kinds of health issues and diet issues. Uh, you probably to use a Nice Wall Street phrase one, uh, consider rebalancing your portfolio.

Michael Schrage – 29:42 – No. Who Do you want your customers to become? So, let’s begin with the Hippocratic oath. First, do no harm. Okay? We don’t want them to be unhealthy. Okay? So, we’re going to manage our formulations different and then we want them to be healthier. So, we’re going to have different kinds of drinks offering since snacks. Awesome. Um, I, I am hesitant about assuming the worst in organization and leaders of organizations that said in an evidence-based data driven and indeed litigious unregulated society, I think it behooves organizations to spend as much time managing downside risk as upside potential.

Allison Hartsoe – 30:29 – And perhaps this question, the ask helps them see that potential risk that they didn’t see before. Again, back to equity. Right.

Michael Schrage – 30:38 – Thank you for putting it that way. That’s exactly this. If you, if you think about it, who do you want your customer to become? Is as much a risk assessment challenge as a opportunity framing.

Allison Hartsoe – 30:52 – Let’s talk about some other examples because that the McDonald’s and Facebook examples are fantastic ways to understand the dark side of the ask and I think that’s a very important place for companies to start. But what about the innovation angle? Because I can sense there’s an awful lot that this question drives in terms of innovation as well.

Michael Schrage – 31:14 – Well, the definition I used for innovation is the conversion of novelty into value and that sort of inherently raises the subjective contextual issue of novel to whom valuable for him. You know, I do a lot of advisory work for large organizations and I’ve been involved in, forgive the phrase digital transformation in many legacy organizations and it’s sort of forgive my language sucks if you’re running it in a larger organization because you can be as innovative as all get out, but for somebody who’s used to Netflix or Amazon web services or Google, what you’re doing inside the firewall doesn’t look nearly as impressive as the stuff that’s going on from Silicon Valley, be it Facebook or LinkedIn or Microsoft, what have you. So, for traditional it department, what you’re doing is incredibly innovative, but as far as your customers are concerned, no not at all. So, context matters here and that’s why it’s. That’s why it’s key.

Michael Schrage – 32:17 – You know, I want to connect this to something that I mentioned in the book that we haven’t really discussed yet and it was a. It was something that I read. I mentioned that Kevin Kelly stuff, but let’s mention another guy, the classic, and I mean Classic Marketing Texts of the 20th century with all due respect to my friend, so kaput. Northwestern was Ted Levitt at marketing Myopia piece for Harvard Business Review in 1960, which was for 50 years, the most requested reprint in the history of Harvard Business Review and the question, the title of it was, because this was Peter Drucker days, it was aligning, ratted you in marketing. What business are you in? If you’re the rail, if you’re a railroad, when the railroad business or your window transportation or logistics business, if you’re an oil company, are you in the oil business or the hydrocarbon business or the energy business and because of globalization and innovation, you need to revisit this question.

Michael Schrage – 33:23 – What business are you in? No, no, no. What business are you really? And my problem was as I read the piece and really thought about it was something was missed and here’s the vignette that really kicked me off and made me starkly realized what was missing. If you were to read that piece and it’s well worth reading, you see that love, it refers to the challenges of coping with technological disruption and so there’s this thing called the car, the automobile, also known as the horseless carriage coming in and annual does this Guy Ford and if you make buggy whips, what do you do? What business are you in? And you know, 11 does this as sort of a throwaway comment, but I’m one of these guys who when somebody throws anything away, I grabbed it. No, because there’s usually a unexpected reason why somebody is being so casual and cavalier and making what could be a really provocative.

Allison Hartsoe – 34:29 – As a journalist background,

Michael Schrage – 34:30 – if you’re in the buggy whip, this are you in the fine leather goods, are you in the animal control business or if we want to be consistent with the rise of the automobile, are you in the steering business? Love it. Never raises, let alone answers these questions, but there is an answer. It depends on which customers you want, and so when I work with organizations, I don’t immediately start them off. Who Do you want your customers to become? I remind them of their love it and say, what business are you in? What business a year, and here’s the book ending. Here’s what business are you in. Who Do you want your customers to become? A bloody well align the answers to both those questions because the answer leverage question sure as heck informs how you answer mine. How do you answer my question? Sure, as heck informs how you rethink I.

Michael Schrage – 35:34 – I’m not asking anybody I met. One of the most important things I’ve learned, and advisory work and teaching is don’t tell people even if it’s true, don’t tell people everything you know is an agnostic. Everything you know is out of date. You have to start from how do you advise her. No, no, no. Don’t do that. You give people. You let people have something that they care about and that they thought about and you allow them. You encourage them, you facilitate them. You empower them to create a narrative that lets them build insanely. They’re already familiar and comfortable, but that doesn’t mean that there aren’t going to be aspects that they’re going to have to. They won’t have to let go, but you simply can’t say to people everything you know about marketing, everything you know about brands.

Allison Hartsoe – 36:22 – No, it’s true. I mean, I, I find that really great insights. Stand on the shoulders of what’s already known and just add another dimension to it just like you described, but by default, do you find that if a company can’t get to a clear answer about what business they’re in, then you really, you’ve almost predicted their demise.

Michael Schrage – 36:45 – Well, I can honestly say to you that I have never done work with a company that couldn’t at least give an acceptable answer to the Levitt question. They may disagree about the intensity and the efficacy of their answer about what business they’re really in, but they can all answer. It’s been my expense. It can all answer the question, yes. There may not be as much rigor as you and I might like to that, but there’s an answer. Um, but you’re correct. Fundamentally, organizations that give weak answers to the business that they’re in and have an ordinate difficulty describing which climb, what could they want their customers to become more of their best customers are the typical customers to become. These got bigger problems than dealing with me.

Allison Hartsoe – 37:33 – Right? Because then it’s focus.

Michael Schrage – 37:35 – Yeah. You know, the, the, the reality is, and this is not a self-serving con, the reality is if we did the behind the mirror focus on their customers, their best customers are the typical customers. Do we really think would be hearing a lot about the quality of your organization and how the organization delivers above and beyond expectations and is a source of pleasant surprise? Yeah. That kind of stuff doesn’t happen by accident. It doesn’t happen by accident, you know, design. I’m not, I’m not a roger. What’s his name? Fan. I’m a Herb Simon, uh, um, design thinking, you know, going back to Herb Simon, it’s the ordering of intention which means you have to have an intention and you have to have the discipline and rigor to sequence it to organizations that are good marketers and follow the who didn’t want your customers to them. They have a design ethos. They have a design sensibility.

Allison Hartsoe – 38:32 – Let’s, let’s talk about that design side. I think that fits nicely into the Dyson story and what I, what I really liked about that story, which also appears in the book of course, is the ability for someone to break out of an industry like, like a typical industry approach breakout into something new based on the very thorough understanding of what the customer wanted and wanted to become.

Michael Schrage – 39:00 – Well, it’s, you know, the Dyson story and I’ve had the opportunity to meet Sir James. I don’t think he’s been made a lord yet. I’m really, really interesting guy and one of the reasons why I got to know Dyson was that my read some of my original research focused back. Do you remember the collaboration stuff on prototyping? And he did something like 5,000 iterations, 5,000 prototypes of the bad list, Dyson vacuum cleaner, you know, and just talk about disruption. It was a different, literally a different physical principle, you know, as a cyclonic vacuum principle as opposed to if you’ll excuse the expression, but hoover suck, impressive, you know, a principal. But what, what, what? We’ll skip the physics and mechanical engineering of vacuum cleaners. What was the DEMARC insight? So, here’s this guy going into an absolutely legacy incumbent dominated industry with something. How does he show that he’s more effective?

Michael Schrage – 39:58 – That was the question. How does he show that he’s more effective? And the answer was pretty bloody obvious. Now that certain materials and valves, but you make the transplant their bags, they don’t see the good everybody. You don’t want to see the dirt because you miss. Let’s take that bug and turn it into a feature. Let’s, let’s literally show how much better we are. And they do the equivalent of a plexiglass for the thing and you can see how much during the Dyson cyclonic vacuum cleaner kicks in. You couldn’t do that. Now. It would be really interesting if there had been a hoover bag, a transparent bag, you know, maybe they do a deal with glad or something and you can see there, but, but the reality is, and I know enough that I can save this was a high degree of confidence. Even if you could manage the physics and computational fluid dynamics of it be less, it wouldn’t have the same impact as what Dyson did, and so you were really in the situation here by showing you, but you could show your work.

Michael Schrage – 41:02 – People could literally see something they had never seen before. Sure. They saw quote unquote cleaner floors, but once they saw the Dyson demo, they realized, Gee, maybe there’s still a lot of dirt and self-care. I want to point out that that that P & G had an analogous set of iterative development with the Swiffer, which has done fairly well for it as a category and as a brand. So, the whole notion of being able to see what you’ve done to see the virtue index. Who Do we want our customers to become? We want our customers to be people who don’t appreciate that are, who can see how well our products work. Who comment on it on it. Now you know, there there’s certain spinoffs of that. I would imagine that for some people, an interesting segment would be after I, the first time I use this for the first two or three times I used this. I never want to see that level of density of filth again. Okay.

Michael Schrage – 42:04 – You know, that’s, you know, so, so, you know, is the place you can. So, there’s certain life cycle that has to be played out here. But, but in terms of closing the deal in terms of making it clear what the value prop was, it was, uh, it was inspired. It teeters on the brink of genes. It wasn’t just the quality of the physical properties of a vacuum cleaner. It was the way the vacuum cleaner literally allowed people to see how it transformed a horrible household chore. Or at least I consider.

Allison Hartsoe – 42:42 – I think we all consider any household chore to be a Horrible Household Chore.

Michael Schrage – 42:47 – I none. No, no, I, I, I’ve, my, my wife would disagree.

Allison Hartsoe – 42:53 – Well, okay, so we’ve covered a lot of ground and of course I highly recommend the book and we’ll be linking to that with the show notes, but let’s say that I’ve, you know, I’ve, I’ve grasped the concept and I really like the direction of asking who I want my customers to become, but you know, it’s a simple question with a lot of nuance behind it. What should someone do first, second, third, if they want to execute or try to apply this?

Michael Schrage – 43:22 – Well, I think putting aside the book, I think it’s actually fairly straightforward. I think one wants to be careful about the level of abstraction and the level of specificity, but when I work with a medium sized organization, I just wanted to take a step back here. Organizations that have a lot of data, there is different ways you can begin more. You know, the more options you have in that regard, the more history you have. You know Winston Churchill Online, you want to the foot, you look back into the past. The easier it is to look out into the future because there are certain fundamentals that don’t change and there’s certain fundamentals around which a lot of change takes place. So if I’m asking, who do you want your customers to become? I’m going to be talking with somebody. They’re really interested in this. I’m gonna say so who’s the customer you love. Tell me why you love him.

Michael Schrage – 44:21 – You make a lot of money from them. What’s the matrix if you guys, for people literally correct, we’re closer over the next few years, over the next two years, how would you want your infraction to change them? How do you want to transform them? How do you want to make them better? What do you want them to say about you? Not In terms of your product, about, about what they’re capable of doing now that they weren’t capable of doing that, right? That soliloquy out form. Do that use case to two or three use cases from. I want you to begin in the specific and then abstracted to a segment. I want you to do that with your best. I want you to do that with your typical, oh, let’s have some fun. Let’s look at your churn folks. The folks who’ve left, why? How would you transform them? How would you legitimately kept them on for another year before they left you in a way that doesn’t compromise you at all? Let’s deal.

Michael Schrage – 45:23 – You know the phrase which people seem to think comes from paper, you know, pushing the envelope is not from the paper industry, it’s from airlines. It describes the trap is always around which planes perform, you know, where they go into stalls, etcetera. Okay? You want to explore the envelope of who you want your customers to become. You want to rethink what segmentation means because traditionally segmentation is about a moment in time. This moment in time, I want you to think dynamically, what’s the way you want that segment to evolve in 18 months? The real-world example, and how do you learn from it? My favorite obvious example is Netflix. Netflix never forget, that’s didn’t begin as a digital streaming company. It began mailing CDs. The original delivery system for Netflix was the good old USA.

Allison Hartsoe – 46:25 – Well, exactly. It’s hard to remember that

Michael Schrage – 46:27 – depending on your dealings with it. Yeah, and if you were more realistically but not so good old us postal service. Okay, so the. The key points I want to make here, which is when they switched over, they were monitoring if he, you know, it was recommendation and state paid a lot of attention to how people actually behave. What did they observe? They observed a certain segment of their users did what good would watch for an hour a day for 90 minutes a day. They would binge watch for three or four hours, binge watch her talk about the dark side of the ask.

Allison Hartsoe – 47:04 – Oh right, right.

Michael Schrage – 47:06 – If we want to actually produce stuff as well as acquire stuff, how might binge watching behavior in form a series that we want to run because clearly would be if we didn’t produce a series that didn’t appeal to our binge watcher.

Allison Hartsoe – 47:24 – Exactly. Exactly. So those questions and that order of operations, of exploring the envelope, it seems like that’s, that is in itself such a huge piece for people to bite off. And, and I love what you said to, to write it out. You know, we’re not talking about building a PowerPoint presentation. We’re talking about really rich deep thinking about that segment and understanding them and what you want them to, what you want them to look like in the future, not just this particular retroactive moment in time. And what particularly drives me crazy is the demographics license. Uh, I would like to think that anyone who listens to this show is so far beyond demographics, licensing. It’s all about behavior and attitude and, and aligning with that, what they’re telling us all the time, what they want and what they want from us. It’s very difficult for businesses to listen. And what you’ve asked them to do is to listen.

Michael Schrage – 48:27 – The design is one that I’ve used successfully in my exec ed classes and with clients. You want to make your customers more valuable and the design is making customers better, makes better customers. If you only make your customers better and they don’t become better customers, you’re doing philanthropy. If you’re making better customers. If you’re making them better customers without making them better, you are ruthless predatory, exploitive capitalist. What you want to do is think in terms of a creative virtuous cycle. How can we make customers better in ways that make them better customers? This is a question that the googles, the LinkedIn, the Facebooks, the Tencent’s, the Alibaba’s, the Netflix have a really good answer to you and I urge the people listening to this to really think in terms of facilitating and enabling that virtuous cycle and the question that they want to launch. That exploration is who do we want our customers to do?

Allison Hartsoe – 49:46 – And if they do that, shouldn’t they be making all of us better by minimizing the dark side of the ask? They should be making the world a better place. Not to sound trite about it, but that’s the alignment, right

Michael Schrage – 50:00 – I don’t think it’s trade off at all. I’m A. I’m a Smithy in that regard. I, you know, the purpose of trade is to leave both people that are off a tree was in the moment. The purpose of investment is to leave both sides better off in the long term, so by definition, if you’re focused on the long-term, you better do a really good job of managing the downside risk.

Allison Hartsoe – 50:24 – Perfect. Are there so many rich things? I love our conversation, Michael there. We’ve hit on so many fantastic topics along the way from segmentation and innovation to equity and value and of course the tradeoff. So, thank you so much for joining us today. I will be including links to, uh, one of the HBR actually the original article that I saw that connected me with, you know exactly the CLV one and anything else you’d like us to link to.

Michael Schrage – 50:54 – I want to thank you so much for the conversation. I enjoyed it as well.

Allison Hartsoe – 50:59 – Remember everyone, when you’re use your data effectively, you can build customer equity. It’s not magic. It’s just a very specific journey that you can follow to get results. Thank you for joining today. Show. This is your host, Alison Hartsoe, and I have two gifts for you. First, I’ve written a guide for the Customer Centric CMO, which contains some of the best ideas from this podcast, and you can receive it right now. Simply text, ambitiondata, one word to 31996, and after you get that white paper, you’ll have the option for the second gift, which is to receive The Signal. Once a month. I put together a list of three to five things I’ve seen that represent customer equity signal not noise, and believe me, there’s a lot of noise out there. Things I include could be smart tools. I’ve run across articles, I’ve shared cool statistics or people and companies I think are making amazing progress as they build customer equity. I hope you enjoy the CMO guide and the signal. See you next week on the Customer Equity Accelerator.