customization and customerization

CUSTOMERIZATION: THE NEXT REVOLUTION IN MASS CUSTOMIZATION J e r r y W i n d A r v i n d R a n g a s w a m y f A B S T R A C T In this conceptual paper, we propose that the next stage of evolution of mass customization is customerization—a buyer-centric company strategy that combines mass customization with customized marketing. Spurred by the growth of Internet and related technologies, many leading companies (e.g., Dell) are beginning to deploy customerization on a large scale. In this paper we define customerization, and describe how it is different from the related strategies of mass customization, personalization, and one-to-one marketing. We also describe the opportunities and challenges companies face in deploying a customerization strategy, and the potential benefits that they might realize. © 2001 John Wiley & Sons, Inc. and Direct Marketing Educational Foundation, Inc. f JOURNAL OF INTERACTIVE MARKETING VOLUME 15 / NUMBER 1 / WINTER 2001 13 YORAM (JERRY) WIND is the Lauder Professor and 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, University of Pennsylvania, Philadelphia, Pennsylvania. ARVIND RANGASWAMY is the Jonas H. Anchel Professor and Professor of Marketing and Research Director of the eBusiness Research Center, Penn State University. We are grateful to Tom Parker who conducted most of the interviews for this article, to Robert Gunther for editorial assistance and to Colin Crook for his most helpful comments. Didi Highlight Didi Highlight Didi Highlight I. INTRODUCTION A new type of mass customization is redefining marketing and business strategies. Many com- panies now offer highly customized products in a wide range of categories, including sneakers, coffee, dental products, newspapers, vitamins, bicycles, cars, golf clubs, eyeglasses, garden de- sign, cosmetics, and greeting cards. Some com- panies, such as priceline.com and DealTime.com have customized the price determination pro- cess; they let customers specify their own prices and then try to locate providers who are willing to sell at those prices. Companies, such as Dell, establish custom websites (called premier pages) for their business customers, whose em- ployees can then order computer configura- tions that have already been approved by their companies. These are examples of what we call customerization, a redesign of marketing from the customers’ perspective. These 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. From Mass Customization to Customerization. Customerization encompasses more activities and functions than mass customization of prod- ucts. Hart (1996) defines mass customization as “using flexible processes and organizational structures to produce varied and often individ- ually customized products and services at the price of standardized mass-produced alterna- tives.” As an illustration consider Cannondale (www.cannondale.com). This company can configure over 8 million different frame and color variations in its bicycles. Likewise, Motoro- la’s Bravo pagers can be configured in millions of possible combinations varying in such dimen- sions as color and shape. But how do these companies translate this ability to produce nu- merous product options into customized shop- ping, purchasing, and consumption experi- ences for their customers? This requires customized marketing, not just mass customiza- tion. In fact, mass customization is just a step toward realizing customized marketing. We pro- pose the term “customerization” to distinguish mass product customization from the new ap- proach that combines mass customization with customized marketing. It is important to recognize that to be good at customerization, a company need not have any manufacturing capabilities at all! As an illustra- tion of customerization, consider the concept of garden.com, which tried to transform the nursery industry.1 Typically, nursery customers go to a local store and select from about 200–300 plants, which in most cases, they have to trans- port back to their homes. In contrast, garden. com starts this process way up on the value chain. Its customers can start with a blank pal- ette or any number of starting formats such as a Japanese or English garden and design a gar- den on their desktop computers, customizing their gardens to the configuration of their lot 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 de- ciding what their garden will be like. The site also contains an encyclopedia of information related to gardening, helpful hints for both am- ateurs and experts, and editorials, all designed to help customers in their decision process. Once customers design a garden, they can gen- erate a “bill of goods” for the items in the garden with a click of the mouse. Garden.com then coordinates the supply chain for these products from its set of over 100 supplier part- ners and orchestrates the delivery of the prod- ucts through FedEx, so that all of the items are delivered together in one shipment at the cus- tomer’s door. The interesting aspect of this business is that garden.com does not own any nurseries nor does it 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 and purchasing experience for each of its customers. Thus, cus- tomerization is more than just mass customiza- tion—it is a business strategy to recast a compa- ny’s marketing and customer interfaces to be buyer-centric. 1Although now in bankruptcy, the concept behind garden.com is sound and a good example of customerization. J O U R N A L O F I N T E R A C T I V E M A R K E T I N G JOURNAL OF INTERACTIVE MARKETING c VOLUME 15 / NUMBER 1 / WINTER 2001 14 Didi Highlight Didi Highlight Didi Highlight Didi Highlight Didi Highlight Didi Highlight Didi Highlight Didi Highlight Didi Highlight Didi Highlight Didi Highlight Interestingly, customerization can be imple- mented with little prior information about cus- tomers, and the product itself can be manufac- tured after customers tell the company what they want to buy. For example, priceline.com sells a standardized product (airline seats), but cus- tomizes 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 func- tion effectively without any manufacturing facil- ities, by simply orchestrating the delivery of the chosen products and services. Both mass customization and customeriza- tion are attempts to provide products and ser- vices that better match the needs of custom- ers—they 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 market- ing side. Also, customerization is inherently de- pendent on Internet and related technologies (particularly the WWW) as a vehicle for imple- menting this concept in an economical way. Customerization begins with customers and offers them more control in the exchange pro- cess. However, companies can still decisively in- fluence customer decision making and choice processes by framing the choice options— which aspects of the product and service can the consumer customize and which are given—by providing relevant information and education, and by making it easier, 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 rela- tionship with customers. In some sense, a firm becomes an agent of the customer—“renting” out to the customers pieces of its manufactur- ing, logistics, and other resources and allowing them to find, choose, design, and use what they need. Customerization versus One-to-One Marketing and Personalization. Customerization is also an enhancement to one-to-one marketing and personalization, terms that are in wide use to- day. Peppers and Rogers (www.1to1.com) de- fine one-to-one marketing as “marketing based on the idea of an enterprise knowing its cus- tomer. Through interactions with that customer the enterprise can learn how he or she wants to be treated. The enterprise is then able to treat this customer differently than other customers.” As implemented, one-to-one marketing is typi- cally initiated by the firm (e.g., offering a smoke-free hotel room based on past prefer- ences indicated by a customer). However, be- cause one-to-one marketing is based on trying to predict what customers want, it may end up providing a customized product even when cus- tomers may not have a clear idea of what they want on a particular purchase occasion (e.g., a smoker may sometimes prefer to have a non- smoking hotel room). Peppers and Rogers also define personalization as “customizing some feature of a product or service so that the cus- tomer enjoys more convenience, lower cost, or some other benefit.” It enables companies to satisfy highly heterogeneous customer needs at low costs. Personalization can be initiated by the customer (e.g., customizing the look and con- tents of a home page as in NetCenter or Ya- hoo!) or by the firm (e.g., a real estate agent determining the set of houses to show to a customer; greeting a customer by name when the customer calls a support line). In contrast, customerization is a buyer-centric strategy. It is under the control of customers and initiated by them. Its focus is to help cus- tomers to better identify or define for them- selves what they want—it is a way for companies to adapt personalization and one-to-one mar- keting for the digital marketing environment. Customerization exploits a “build-to-order” mass customization process to deliver a product or service that best fits the needs of the custom- ers. In fact, the product is sold before it is produced! In contrast, at their core, one-to-one marketing and personalization are not necessar- ily initiated by customers nor executed under their control. More importantly, they do not closely integrate the production and supply chains with marketing. Instead they rely on modifying an established product or process at their periphery to fit the needs of specific cus- tomers. The main drawback of these strategies is that they could put a firm at a competitive M A S S C U S T O M I Z A T I O N JOURNAL OF INTERACTIVE MARKETING c VOLUME 15 / NUMBER 1 / WINTER 2001 15 Didi Highlight Didi Highlight Didi Highlight Didi Highlight Didi Highlight Didi Highlight Didi Highlight Didi Highlight Didi Highlight Didi Highlight Didi Highlight Didi Highlight Didi Highlight Didi Highlight disadvantage relative to nimble competitors, who are increasingly using more sophisticated customerization strategies. The distinctions between customerization, personalization, and one-to-one marketing are summarized in Exhibit 1. These differences are particularly salient for Business-to-Business (B2B) companies. Companies such as Freemar- kets Online and Chemdex.com are completely transforming channels and exchange relation- ships in B2B markets to be more buyer-centric. For example, Freemarkets Online offers a bid- ding mechanism in which multiple suppliers bid online on well-specified products and ser- vices that are put out for bid by firms. Marshall Industries (www.marshall.com) helps design en- gineers in the electronics industry to use the information and tools available at their site to design new products. Designers can custom-de- sign products using parts from various suppli- ers. (Incidentally, marshall.com has been voted the best business-to-business site on the Web two years in a row by Business Marketing maga- zine.) B2B customers are also increasingly de- manding deeper links into the production and organizational processes of their suppliers (e.g., for 24/7 access to order status, automatic inven- tory replenishment, remote diagnostics). To ac- commodate such customers, B2B companies need to offer more than customized products and services—they need to customerize their internal processes and supply chain partner- ships to more fully meet the differing needs of their customers. Exhibit 2 identifies alternative ways for cus- tomerization strategies to evolve in a com- pany. The road to customerization is often through personalization and/or mass cus- tomization. Given the heterogeneity of prod- ucts and market segments available to a com- pany, an optimal strategy would often involve a portfolio of all four strategies identified in Exhibit 2. In developing a strategy for customerization, a company should be guided not only by cus- tomers’ wants and needs that are best satisfied by customized offerings, but also its operational capabilities. At one extreme is the situation where targeted customers have no need for cus- tomized offerings, and the firm offers standard- ized products (e.g., salt will probably continue to be sold in this way). At the other extreme are offerings where customers desire a high level of customization and the production process al- lows the customization of the product and ser- vice offerings at reasonable costs. Products with a large amount of “digital content” (e.g., soft- ware, music, business cards) fall in this category. Here, customization can be done by the cus- tomer, the firm, or by an intermediary. Finally, there are many products where some customer segments have needs that are best satisfied by product customization, but there may be signif- icant costs (relative to selling price) involved in satisfying those needs (e.g., cars, IC chips, cos- metics). Here both customers and firms face a tradeoff situation, and the costs and benefits of customerization have to be evaluated carefully. For example, Nike offers customized sneakers (with customized engraving up to eight letters), but charges $10 for the customization. In summary, a firm’s decision to move from E X H I B I T 1 Differences between Personalization, One-to-One Marketing, and Customerization Personalization One-to-One Marketing Customerization Locus of control Customer/Firm Firm Customer Customer co-design Low Low High Prior data about customers Low High Moderate Links to production/supply systems Low Low/Moderate High Links to customer systems (especially B2B) Low Moderate High Does it require build-to-order system? No No Yes J O U R N A L O F I N T E R A C T I V E M A R K E T I N G JOURNAL OF INTERACTIVE MARKETING c VOLUME 15 / NUMBER 1 / WINTER 2001 16 Didi Highlight Didi Highlight Didi Highlight Didi Highlight Didi Highlight Didi Highlight Didi Highlight standardization to customerization is based on the changing customer needs and desires, their interest in customerization and ability and competencies to engage in this co-pro- duction process as well as the firms’ techno- logical and operational capabilities, and the business model it pursues. In this article, we use examples from leading-edge practice to help managers frame their thinking about what customerization means for their own companies. We summarize the reasons for the growth of customerization, its potential ben- efits, and the challenges of implementing a customerization strategy. For this article, we used both library research and interviews with pace-setting companies to gain an under- standing of how customerization is transform- ing the marketing function, and how manag- ers can take advantage of customerization to reinvent themselves by building strong and lasting relationships with their customers and thus, grow and strengthen their businesses. The Next Revolution in Customization The impact of mass customization on manufac- turing is well known. The technology and strat- egy of lean production significantly changed the tradeoffs between efficiency and customiza- tion, sending shock waves through manufactur- ing (see, e.g., Nicholas, 1998; Delbridge, 1998). While much attention has been given to the impact of customization on manufacturing, we are just beginning to understand its impact on marketing. Early customization efforts were in the form of “made to order” products and services (e.g., furniture or tailored suits), which, however, had long lead times and were not tied to flexible manufacturing systems. The recent advances in flexible manufacturing, coupled with the collec- tion of detailed information about customers, and advances in database marketing and its as- sociated analytics [e.g., CASA’s Adaptive Dy- namic Marketing (ADM) and Relationship Value Tags (RVT)], enables firms to offer prod- ucts tailored to customers’ needs but at costs that are almost the same as that of standardized production and mass marketing. This shift is illustrated in Exhibit 3. As shown in this exhibit, mass customization changed the centuries-old tradeoff between tai- loring a product to the needs of specific cus- tomers and the costs/time associated with deliv- ering the desired product. Continuing innovations in flexible manufacturing, inven- tory management, and integration of global E X H I B I T 2 Pathways to Customerization M A S S C U S T O M I Z A T I O N JOURNAL OF INTERACTIVE MARKETING c VOLUME 15 / NUMBER 1 / WINTER 2001 17 Didi Highlight Didi Highlight Didi Highlight Didi Highlight supply chains have provided further impetus in favor of delivering customized products quickly and at reasonable costs. But the strategic impact of these developments has pretty much been played out in the marketplace in the last de- cade. Increasingly, it is becoming evident that the customizability of marketing is a limiting factor for realizing further benefits from mass cus- tomization. Millions of manufacturing options are not exercised and less-than-satisfied custom- ers stay with mass-produced products. One in- formal study determined that while an auto manufacturer ostensibly offered 20 million pos- sible variations of a popular sports coupe, most customers chose from among the 20 or so mod- els that were actually in stock at local dealers (Fisher, Jain, & MacDuffie, 1995). In contrast, Dell Computer Corporation was able to satisfy the needs of its customers better by producing 25,000 different computer configurations in 1999! Recently, the auto companies have an- nounced plans to customerize. For example, General Motors announced a build-to-order sys- tem that would enable customers to custom- design cars online, which are then to be deliv- ered within as few as four days. Such a system calls for a complete restructuring of the compa- ny—its order processing, manufacturing, and distribution. Cars would need to be redesigned to simplify manufacturing. Suppliers, factories, and dealers would be wired together via the Internet, helping the company to cut in half the $40 billion in parts and unsold inventory the company carries at present (Simison, 2000). Mass customization and customerization can offer significant benefits both to customers and the firms offering them. These are summarized in Exhibit 4. From the customer’s perspective, the real benefit is the ability to find and or design products and services that meet their needs. There is some experimental evidence that customization increases satisfaction—cus- tomers allowed to specify their attribute prefer- E X H I B I T 3 The Mass Customization Paradigm J O U R N A L O F I N T E R A C T I V E M A R K E T I N G JOURNAL OF INTERACTIVE MARKETING c VOLUME 15 / NUMBER 1 / WINTER 2001 18 Didi Highlight Didi Highlight Didi Highlight Didi Highlight Didi Highlight ences in selecting products were more satisfied (Huffman & Kahn