Unlocking the Customer Value Chain
28 Jan 2025| Book | Unlocking the Customer Value Chain: How Decoupling Drives Consumer Disruption |
| Author | Thales S. Teixeira and Greg Piechota |
| Published | February 19, 2019 |
The concept of the “customer value chain”
Wondering precisely how disruptors were unsettling small parts of incumbents’ businesses, I turned to a basic framework that my colleagues and I teach our students: the customer’s value chain, or CVC. A CVC is composed of the discrete steps a typical customer follows in order to select, buy, and consume a product or service. CVCs vary according to the specifics of a business, industry, or product. For example, the key stages in a CVC for purchasing a flatscreen TV involve going to a retailer, evaluating the options available, choosing one, purchasing it, and then using the TV at home. For a beauty product such as skin cream or for a videogame, the value chain is basically the same. In the case of videogames, players evaluate the available game titles, choose one or more, purchase it, and then play it.
Disruptors decouple the customer value chain to generate innovation
What I realized, as I thought about these examples, was that disruptors had posed a threat by breaking the links between some of the stages of the CVC and then “stealing” one or a few stages for themselves to fulfill. To facilitate comparison shopping, Amazon created a mobile application (app) that allowed shoppers in brick-and-mortar stores to search, scan the barcode, or snap a picture of any product to easily discover Amazon’s price. This enabled Amazon’s customers to easily break the connection between choosing a product and purchasing it. Best Buy did the former, Amazon the latter. Similarly, Birchbox enabled its customers to easily separate the testing of beauty products (fulfilled by Birchbox) from the choosing and purchasing stages (fulfilled by other retailers). Upstart game developers allowed customers to separate out the purchasing of games from the act of playing them.
Two definitons of a business model
A business model specifies how the firm creates value (and for whom), and how it captures value (and from whom).
A business model from the customer’s point of view: “A business model consists of the value a business creates for me, what it charges me in exchange for that value, and what value it erodes for me.”
A methodology for building/ finding an innovative business model
I’ve had a chance to watch many entrepreneurs in action and to follow their thinking as it has evolved. Some entrepreneurs conceptualize their new business model all at once, in a single, grand epiphany. They proceed intuitively; rather than methodically. Twitch’s founders are a good example. They began with a single, “big” idea-allowing people to live-cast on the internet their day-to-day activities that was centered on technology: After many twists and turns, they arrived at their eventual business model of allowing gamers to decouple playing games from the activity of viewing top players playing them. Other entrepreneurs are more deliberate than this, beginning by analyzing the existing model in their industry and then layering their own innovation on top. But they still proceed largely by feeling their way; reacting opportunistically to circumstances as they arise.
What if entrepreneurs could proceed far more methodically? What might that look like?
I typically recommend that entrepreneurs or executives embrace the customer’s vantage point and organize their thinking in terms of three layers. The first layer is to articulate the current or standard business model. After all, most startups need to pull customers away from existing businesses or activities (e.g., dry cleaning versus do-it-yourself clothes washing). Customers evaluate the startup in comparison to what they already have. If you want to thoroughly understand a new business idea, you must take the current reality as your foundation.
The second layer is to develop the digital equivalent of the standard model. Almost all young entrepreneurs I meet today incorporate the internet into their business ideas. When comparing their innovative products to the best options that are currently available, the less elaborate ideas tend to focus on simply translating or “porting” a traditional business model onto the internet.
With this digital equivalent layered on top of the standard business model, the third and final layer for entrepreneurs and executives is to determine how to innovate on top of digital business models. Some entrepreneurs I’ve met understand that the mere porting of a business model online isn’t enough. It might benefit users, but it creates downsides, too. TaskRabbit accelerates the process of choosing people to perform chores for you, but it’s also riskier, since it requires that you allow complete strangers inside your home. Washio offered convenience, but at a price. Considering the benefits and costs, smart entrepreneurs try to layer on top of their digital business idea an innovation that transcends mere digitization, and that produces a functional benefit for customers.
The concept of a “consideration set”. A similar argument is made in the book “Positioning” where there are only so many brands that can occupy the average consumer’s mind.
Customers always have a choice as to what to purchase. In many categories, they have more choices than ever. How do customers select a car, say, when faced with dozens, even hundreds of options?
In the face of such complexity, customers tend to simplify the task of choosing, employing a two-stage approach. First, they use quick and simple filtering techniques to eliminate undesirable options. They then perform a slower, more elaborate comparison of the remaining options.
This leaves them with what marketers have called a “consideration set,” a group of brands that customers actively consider before selecting one to purchase. The consideration set is one of the most important marketing concepts of the past few decades. It posits that brands in consumer products don’t compete by vying at once for each customer in one big match-up. Rather, the competition resembles the Olympic Games, where swimmers, say, compete head-to-head for the gold medal in stages.
As academic research in marketing has shown, customers compose consideration sets on the basis of their awareness of and preferences for various options, as well as based on brand image, product differentiation, and category-specific factors. Consideration sets can vary greatly by the person, category, and even country.
Firm vs customer side synergies: rather than thinking about what internal capabilities lend themselves to another offering/ business, instead think about what offerings are “adjacent” to my customers within their value chain
The vast majority of conventional approaches to growth pertain to possible firm-side synergies: “How can I leverage my powerful brand, vast distribution network, marketing prowess, production skills, or intellectual property to expand into new products or markets?”
But we could very well pose similar questions from the customer’s perspective: “If customers buy my product in order to perform one of the many activities in their CVC, enjoying reduced monetary, time, and effort costs, then how might we make it worthwhile for them to perform another, neighboring activity in their CVC?” Or, put differently: “What else might we provide to our decoupling customers such that the combination of both activities (and possibly additional ones) reduces their total cost below that of the incumbent, and below the costs they would incur if they used separate vendors?”
Customer-side synergies: Cost reductions that the customer gains while consuming multiple activities provided by a single firm.
CVC adjacencies: Activities immediately preceding and following those that a customer chose to decouple from an incumbent.
Coupling: linking and/ or strengthening links between customer activities
If you use Outlook (owned by Microsoft) as your company email provider, you can effortlessly contact each of your business contacts using Skype (bought by Microsoft) from your email account. As you talk to them, you can quickly pull information on them from LinkedIn, another business bought by Microsoft. If you integrate two activities favorably for customers, then you can continue to tack on adjacent activities, moving outward along the CVC. This forms the foundational basis of growth by coupling.
Coupling: The act of sequentially adding and strengthening the links between adjacent customer activities captured from an incumbent.
Business units within a company should map to major customer value chain activities
What makes the most sense is to organize your businesses around customers and the value you provide them. As you expand your business to cover different parts of the customer’s value chain, it’s natural to organize the company around the CVC as well. Your business units should map one-to-one with major CVC activities. As the old adage goes, structure follows strategy.
Customer value chain disruptors value customers over resources (and often don’t have resources), whereas incumbents value resources/ assets much more highly
Because they lack significant resources to attract customers, disruptors approach their business with a different mindset. Uber didn’t have cars. Airbnb didn’t have hotel rooms. Netflix didn’t have stores. For disruptors, revenue growth originates in one place, and one place only: customer acquisition. If such acquisition requires an asset, then the disruptor might want to build, acquire, or borrow that asset from others. But disruptors don’t regard the asset as the end game. Regardless of the means to get those resources, startups mill resources to get customers, instead of milking the customers. Thei mindset isn’t resource-centric but truly customer-centric. Just look at the metrics that startups commonly use: customer lifetime value, average revenue per user, and revenue per active customer.
In general, incumbents regard revenue growth as a direct consequence of growth in their most valuable assets. Those resources attract paying customers, which the incumbent milks to exhaustion. That’s the incumbent’s moneymaking formula, and it’s reflected in the key metrics that executives in incumbent businesses use to make decisions: sales per square foot of store space, in the case of retailers; accounts or income per branch, in the case of retail banks; and revenue per mile of fiber-optic cable in the case of telecoms.
Lack of innovation is a customer-centricity problem
At most large, prestigious firms, we find similar dynamics at work. Lack of innovation is a customer-centricity problem, not an R&D problem. Therefore, asking your product developers inside the company to “just innovate” will rarely head off a growth stall. To innovate, you first need to eliminate impediments to customer centricity among both leaders and managers.
Ultimately, a customer-centric company has a governing body and an executive team that not only understands digital disruption in general, and decoupling in particular, but also appreciates the force animating all healthy companies from their earliest days: a drive to better fulfill the customer’s needs.
“Present-casting” as a way to forecast
The big changes that will surely figure prominently many years from now are already upon us, if you know where to look. We can prepare for the future by studying the present-what is called “present-casting.” This is a much simpler and more accurate proposition than forecasting, and in fact it already has a number of fans in the marketing world. In 2009, Google’s chief economist Hal Varian published a controversial paper entitled “Predicting the Present with Google Trends” in which he showed how to use historical data (for instance, about popular Google search terms) to learn about a nascent trend. Since then, many researchers have used historical and present-day data to show present-casting’s merits in domains of consumer activity such as travel, real estate, health, and transportation.
Collectively, these researchers have shown that capturing present trends is more accurate when data are bountiful, and it serves businesses better than inaccurately trying to predict future changes not already present. As the sixth-century-BC Chinese poet Lao Tzu once wrote, “Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.”