The idea of “co-creating” with customers has been circulating for years, but until recently few companies effectively exploited its power or understood its contribution to the bottom line. True, customers can customize their M&Ms, build their own bikes with Trek Project One, create unique doors for their home at Jen-Weld, and design their own Nike running shoes. But these co-creation models produce only one-off physical goods, and none represents a fundamental shift in how these companies create value; they’re peripheral to the core business.
Today, however, by exploiting new digital technologies, firms like Apple, Lending Club, and AirBnB have made customer co-creation of value central to their business models and in doing so now rank among the world’s most innovative and valuable firms. Our research indicates that companies that make their customers partners, and share the value created, lead the pack on revenue growth, profit margins, capital efficiency, and enterprise value. We call these companies Network Orchestrators. By leveraging customer networks and their tangible (e.g. homes and cars) and intangible (e.g. expertise and relationships) assets, firms can gain these advantages of the Network Orchestration business model.
How, then, do firms cultivate these valuable customer networks? It starts by understanding customers’ affinity with the brands.
Four levels of affinity
Through our research on network-centric businesses and our experience advising hundreds of companies we have developed a framework for understanding customer affinity.
Insight Center
Most leaders are already working to deepen customers’ relationships—converting uninterested consumers (transactors) into passionate brand advocates (promoters). However, what these executives don’t fully appreciate is that the customer affinity spectrum extends far beyond promotion. Through co-creation, companies can access a deep well of customer capabilities, knowledge and assets.
Although the Net Promoter Score (NPS) is a market standard, customer promotion alone can’t sustain a co-creation model. Promoters might give you their dollars and promote your brand with their Tweets or Facebook “likes”, but today’s connected customers want to give, and receive, more. Creating models based on co-creation requires identifying the subset of customers with the right kind of brand affinity.
These four types of customers represent different levels of brand affinity:
1. Transactors: These customers have no loyalty to your brand. Although they may make purchases, they are unaware of or not swayed by your brand proposition and do not desire a relationship with your company.
Example: Carol owns a small business and needs a customer relationship management (CRM) platform. Overwhelmed with choices, she signs a one-year contract with the first salesperson that returns her call, planning to reevaluate next year.
2. Supporters: These customers are aware of your company and brand, and buy from you consciously. They support your company by purchasing regularly. However, they do not promote your brand and they may switch easily to other products.
Example: Jim’s firm has used the same CRM software for ten years. The functionality barely meets his needs, but he hasn’t yet had the time to invest in finding a better solution so renews his contract, but only on a month-to-month basis.
3. Promoters: These customers frequently purchase your products or services and are very loyal. Their affinity is strong enough that they advocate for your company to their networks helping your company grow through word-of-mouth.
Example: Ann just switched to a new CRM platform and has heard from the sales team that it saves time and increases conversion. Happy about these results, Ann recommends it to all of her followers on social media.
4. Co-creators: These customers are so engaged with the brand that they share in the value creation, and receive value back. They create and offer their own assets, knowledge and relationships in exchange for a share of the value generated—including revenue and profits.
Example: Jacob loves his CRM software and has become an expert in its use. He decides to use its open source platform to create add-on apps that he believes will be useful to other users and posts it on the company’s app exchange.
A significant shift happens when customers reach co-creation status with a brand. With Transactors, Supporters, and Promoters, the company is responsible for fulfilling the customers’ needs. However, when a company co-creates with its customers (usually by providing a technology platform which facilitates interactions and transactions), company and customers create shared value.
To help you better understand where you and your customers fall on the customer affinity spectrum, take our Customer Type Assessment. While there are many ways to segment customers, this type of segmentation is particularly useful because of its implications for the business model.
Companies that co-create
Let’s look at three companies that leveraged digital capabilities to build customer co-creation into their business models. Each has moved beyond allowing customers to design their own products, to share value by acting as a platform to promote the customer networks’ talents and assets.
- Apple’s Developer Network: Apple provides the platform; companies and individuals provide the applications. They each receive a portion of the value created, whether revenue, awareness, or utility. Over its lifetime, the app store has generated more than $25 billion for developers.
- Airbnb.com: Airbnb provides the online database and some additional services; their partners provide the good sold—the properties for lease. Revenues are shared and together Airbnb and its “hosts” have built a company that was most recently valued at more than $25 billion, more than the value of Hyatt Hotels.
- Lending Club: This peer-to-peer lending platform connects would-be borrowers and lenders. All of the “products”—loans and investments—are created and provided by its members. Lending Club went public in 2014 and its enterprise value is nearly $9 billion.
Co-creation advantages
Customer co-creation is central to the Network Orchestration business model. Our research shows that companies that facilitate a network of co-creators deliver shareholder value two to four times greater than companies that don’t leverage co-creation business models. We see four main reasons for this value gap:
Greater revenue growth: As co-creating partners, customers have an incentive to help grow the business. Your success is theirs, whether the rewards are monetary or intangible. Co-creation is less a measure of “customer loyalty” than an indicator of “reciprocal loyalty,” where both parties serve each other.
Lower marginal cost: Your customer co-creators bring an entirely new set of assets to the company, at a very low or near-zero cost (see Rifkin’s The Zero Marginal Cost Society). They may be willing to share their opinions, skills, relationships, and even their real assets (cars, apartments, etc.) for the right incentives and shared value.
Improved customer insight: The increased customer intimacy that comes with co-creation deepens your understanding of your market, enabling you to serve it better. When customers co-create and have a vested interest in its success, they are more willing to share personal data and other assets with it.
Increased organizational flexibility: A network of customer co-creators increases the company’s adaptability and speed. This network is distributed and self-organizing, which makes it highly responsive to changing customer needs. When a new vacation hotspot emerges, Airbnb does not need to change its supply chain or purchase new properties; instead its co-creation network naturally expands to satisfy the demand.
Five steps to co-creation
Customers cannot be coerced into co-creating. They must be eager participants in the value equation. To drive co-creation, you must invite your customers into the value equation. We recommend a five-step process called PIVOT: Pinpoint, Identify, Visualize, Operate, and Track.
1. Pinpoint where your customers currently lie on the customer affinity spectrum and the areas where they will be most interested in co-creating. Evaluate your leadership team’s openness to co-creation as well.
2. Identify the characteristics of your key customer groups, including their level of engagement, their unmet needs, and any tangible or intangible assets that could be leveraged in a co-creative relationship.
3. Visualize a new business model where your customers co-create with your firm to help meet their own needs. Based on their characteristics, design a system that will incent them to participate, with a particular emphasis on leveraging digital technologies as the platform.
4. Operate your new co-creative digital business. Fund it, recruit the right digital talent, and insulate it from the politicking of the broader firm. Experiment and iterate rapidly.
5. Track the performance of your co-creative customers and the value they add. Add new metrics to standard financial reports, including the revenues customers generate and the costs saved through their participation.
As written, these five steps seem relatively simple, but we all know they are far more difficult in practice. The biggest hurdle to co-creation is usually shifting the leadership team’s mental model. Most leaders are so accustomed to owning the value creation process that they cannot imagine the customers as active participants, instead of passive recipients.
Think of it this way: Does the hospital ask patients to help design their own healthcare? Do professors enable college students to contribute to the curriculum? Do auto manufacturers allow drivers to co-create their next car? In general, no. But they might see a dramatic change in engagement and innovation if they did.
Giving up control, and sharing rewards, may seem terribly risky, but it is the key to the co-creative business models that generate unprecedented value with lower marginal costs, and greater profits. It’s unwise to delay this journey any longer. Your customers are waiting.
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