Innovate the Future: Who Owns Your Customer Now?
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Many companies feel that as long as they continue to deliver new features, their customers will remain loyal, even as prices rise. But at some point, customers seem to ignore new features and loyalty, and their willingness to pay goes out the window. This article discusses how ownership of intellectual property isn't all it's cracked up to be. An unseen pressure devalues intellectual property and the transformative value of your products, even to the most loyal customers. Then your competitor owns your customer.
Everyone Eats
I'm sure that some people wonder why I use food so often as an example when I'm discussing innovation. Well, I'll tell you:
- I like food.
- Everyone I know eats.
- People have their own opinions about the foods they like.
- People can disagree about food, and yet normally they avoid killing each other over those opinions.
- People can often find at least one food that all agree they love or hate.
- It's easy to make good food into bad food.
- It's hard to make bad food into good food.
- Having a successful restaurant is one of the biggest business challenges.
Hot-and-Sour Soup with an Eggroll
Some people love a really good hot dog with all kinds of bizarre trimmings. Some folks are crazy about an out-of-this-world Philly cheese steak sandwich. Some go for more upscale foods. I prefer Asian foods, and I usually crave a delicious bowl of hot-and-sour soup and a crispy eggroll.
It seems as if every time I find a great Asian restaurant, it closes. I don't tend to try new restaurants (or even notice that they exist) until they've been around for a year or so. Once I find one I really like, I try not to get emotionally attached to it, because within a year or so it'll be gone. Invariably, the most stable Asian restaurants with the best food are small hole-in-the-wall places.
What makes seemingly very successful restaurants fail in that two-year window? I can tell you right now that, at least in my case, it has nothing to do with the quality of the hot-and-sour soup or the eggrolls! The food is still fantastic. But, over time, the number of customers coming in starts to decrease, and then the restaurant closes. And then I'm on the hunt again.
Here's what seems to happen, in a logical sequence:
- New restaurant opens. (I won't see it for a year or so. How sad—I missed all that great soup!)
- Food is excellent. (I found them! Especially the hot-and-sour soup.)
- Service is great. Friendly and prompt. (One of those "let's visit" atmospheres.)
- Customers knock down the door. (Kind of irritating when they take my preferred table.)
- Variety of food expands. Prices increase slightly. (I tend to stick with my favorites.)
- Service starts to falter. (The real danger is the empty water glass and "hot spicy mustard" combo.)
- Prices start to go up. (Not much—fifty cents here, a dollar there.)
- Customers start to vanish. (My table is available!)
- Quality begins to stumble. (Soup and eggrolls still great. But smaller quantities. And less meat.)
- Prices continue to rise. (Now I go just for the soup and eggrolls.)
- Customers are gone. (Sad. I don't go much myself anymore. The atmosphere is gone.)
- Restaurant closes. (Sometimes I don't notice for a month or two.)
Now, don't get me wrong. This is probably not a universal description of the life of a restaurant. But I think it's pretty darn close.
Success Is a Killer
Not being a restaurateur, I've always been amazed that they survive at all. But I've never bought food wholesale, and didn't really know the margins. It's kind of like my kids wanting to sell lemonade on the street for 25 cents a cup. I want them to learn the value of working for their money and the principles of commerce. Every cup they sell, I seem to lose money. Yet I can go to 7-Eleven and get a half-gallon cup of lemonade with infinite refills for a buck! Yes, I'm being a little bit facetious. Not much, though—it really is almost that broad of a difference. Now, maybe 7-Eleven is selling lemonade as a loss leader. But I don't think so. Everything I read says that the drinks are their big moneymakers.
I talked to a friend who owns two successful restaurants, and proposed my logical restaurant sequence (above) to her. I wanted to understand what was happening behind the scenes that drove this sequence. Or was I missing it entirely? She concurred with my description of the life of a typical restaurant, and she was able to provide the details that I was missing.
What did we determine? We found that the very success of the restaurant is what killed the place. The key step in my sequence that represents the tipping point from success to failure happens early: "Variety of food expands." These are the reasons:
- Underlying costs of maintaining a larger variety of ingredients
- Volume of daily waste caused by an expanded menu
- Complexity of serving a broader menu accurately
- Increase in kitchen staff needed to prepare a broader range of dishes within an acceptable timeframe and level of quality
Compare a fast-food restaurant like McDonald's:
- Limited number of ingredients
- Food that's easy to prepare in a timely manner
- No extensive training required for food preparation
- Limited waste at the end of the day, since meats remain frozen until needed. (I wonder how much meat Wendy's stocks, since they say it's "never frozen"?)
Every time McDonald's tries to introduce a new dish, the chain (smartly) remains within these constraints. Otherwise, we'd see McDonald's restaurants closing their doors everywhere.
Too Much Salt in the Soup
Where did all those restaurant customers come from in the first place, and why did they shove their way into my favorite booth? They came because the food at the new restaurant satisfied several requirements extremely well:
- Consumption priority: People have to eat, and they want to eat good food.
- Time priority: People want to use their time efficiently.
- Money priority: People want to spend their money wisely.
Let's track our fictitious Asian restaurant (oh, man, that soup!) and see how these priorities play out during the logical sequence discussed earlier, and how each stage affects these priorities:
- New restaurant opens. Impact: Coupons satisfy the initial risk for the "money" priority.
- Food is excellent. Impact: The food satisfies the "consumption" and "money" priorities.
- Service is great. Friendly and prompt. Impact: Service satisfies the "time" priority.
- Customers knock down the door. Impact: Transformative value of the restaurant is maximized. (I'll talk about transformative value in the next section.)
- Variety of food expands. Prices increase slightly. Impact: Complexity of choice starts to muddy the water in the "consumption" priority. Higher prices start to impact the "money" priority. Transformative value starts to slide, and it continues to decline for the rest of the sequence.
- Service starts to falter. Impact: Customers start to question whether the restaurant maximally satisfies their "consumption" priority. Is the food worth the service issues? Also, is the customer's time worth more than sitting in the restaurant waiting for service? This directly impacts the "time" priority.
- Prices start to go up. Impact: Is the food worth the increasing price, considering the service issues? Direct impact on the "money" priority.
- Customers start to vanish. Impact: The decreasing number of customers starts making the remaining customers question whether they're spending their time and money optimally, or if there are better options elsewhere. All three priorities—"consumption," "time," and "money"—are impacted.
- Quality begins to stumble. Impact: The restaurant is trying to avoid raising prices by lowering quality. Direct impact on both the "consumption" and "money" priorities.
- Prices continue to rise. Impact: Customers begin to order less, which severely damages their "consumption" priority. Ever-increasing prices (which we all notice and remember) destroy the "money" priority.
- Customers are gone. Impact: Nobody wants to be the only person in the restaurant. The air seems to be filled with desperation, rather than the previous "let's visit" atmosphere. Even very loyal customers don't want to be depressed by watching the restaurant die. All three priorities are impacted, as the customer wants a more pleasant, less expensive, and timelier eating experience.
- Restaurant closes. Impact: The transformative value of the restaurant's food had reached a level too low to bring the customer back in the door. Customers have shifted all three priorities to alternative restaurants and foods.
Eventually the restaurant pushed its customers out the door. It wasn't as simple as too much salt in the soup. The restaurant failed because the owners forgot that the customer was buying their soup for a set of very specific reasons—and the restaurant damaged all of those reasons.
Transformative Value
How customers perceive and utilize a product—and then subsequently value the deployed product—determines whether the product is merely competitive with existing products, or is innovative to some degree. The result could be summarized as the product's "transformative value" or "transformative impact." In other words, how much does the new product transform the consumer's life or business? This transformative value can be broken down into different priorities, such as the "consumption," "time," and "money" priorities discussed earlier.
The restaurant I described in the preceding sequence repeatedly took actions to shore up its revenues, rather than taking actions to shore up the transformative value of its food and service to the customer. I refer to these actions as negative and destructive inventions. By expanding its menu (a potentially destructive invention), the restaurant created a cascade of events that eventually destroyed the transformative value of its food and dining experience.
Success Breeds Assumptions
Once the restaurant became successful, the owners began to assume that their model could handle an expansion of new menu items at a higher price. This is just like a software company adding new features each year and then increasing upgrade, support, and maintenance costs. Initially, these incremental innovations appear to be successful. The restaurant is making more money and getting more customers. But the impacts on the transformative value to the customer are hidden at these early stages. As time progresses and competition enters the market, the transformative value will begin to plummet. Customers will begin to reassess their priorities and will shift their consumption.
The restaurant reacted to business pressures and made what appeared to be sound business decisions based on the current atmosphere: "If income is increasing, you should expand your market penetration. If income is decreasing, you should cut your costs." But each of these decisions destroys the very foundation that made the restaurant initially successful. The assumption that the larger menu was still needed in order to succeed became a driver of all business decisions and killed the restaurant. The restaurant had gone beyond what the customer considered a "good enough" product.
Stop Being Great, and Start Being 'Good Enough'
Companies assume that their ever-expanding intellectual properties (for the restaurant, its recipes) are the foundation of their success, and the reason that their customers think they're great. But in reality, the customer is balancing a set of priorities that must be met optimally for the customer to continue to make a positive buying decision.
To recapture their success, many companies continue trying to create an ever-increasing number of features (for the restaurant, menu items). In the process, they severely damage the transformative value of their products to their customers. Each step the company takes creates another assumption that hides the true cause of its problems: the expanded feature set (menu).
To find your success, you must strip away existing assumptions, locating the foundational intellectual property that made your company great in the first place. Go back to being "good enough." Then you can make some damned fine hot-and-sour soup.