The idea of ”co-creating” with clients has been around for years, but until recently few companies have used its power effectively or understood its contribution to the bottom line. Of course, customers can customize their M&Ms, build their own bikes with Trek Project One, design unique doors for their home at Jen-Weld, and design their own Nike running shoes. But these co-creation models only produce one-off physical goods, and none represent a fundamental change in how these companies create value; they are peripheral to the core business.
Today, however, companies such as Apple, Lending Club and AirBnB have put the shared value creation through the customer at the center of their business models through the use of new digital technologies, making them among the most innovative and valuable companies in the world. Our research shows that companies that turn their customers into partners and share the value created lead in terms of revenue growth, profit margins, capital efficiency and shareholder 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, organizations can leverage these benefits of the Network Orchestration business model.
How do companies maintain these valuable customer networks? It starts with understanding the customers’ affinity for the brands.
Four levels of affinity
Through our research on network-centric companies and our experience advising hundreds of companies, we have developed a framework for understanding customer affinity.
Most executives are already working to deepen customer relationships and convert uninterested consumers (transactors) into passionate brand advocates (promoters). What these executives don’t quite appreciate, however, is that the spectrum of customer affinity extends well beyond promotion. Through co-creation, companies can access a deep well of customer skills, knowledge and assets.
Although Net Promoter Score (NPS) is a market standard, prospecting alone cannot sustain a co-creation model. Promoters might give you their money and promote your brand with their tweets or Facebook “likes,” but today’s connected customers want to give and receive more. In order to create models based on co-creation, the subset of customers with the right type of brand affinity needs to be identified.
These four customer types represent different levels of brand affinity:
1. Transaction partner: These customers are not loyal to your brand. Although they may make purchases, they are unaware of or swayed by your brand promise and do not want a relationship with your business.
Example: Carol owns a small business and needs a CRM (Customer Relationship Management) platform. Overwhelmed by the choice, she signs a one-year contract with the first salesperson who calls her back, planning a re-evaluation next year.
2. Supporters: These customers know your company and your brand and make a conscious decision to buy from you. You support your company with regular purchases. However, they do not advertise your brand and can easily switch to other products.
Example: Jim’s company has been using the same CRM software for ten years. The functionality barely meets his needs, but he hasn’t had the time to invest in a better solution yet, so he’s renewing his contract, but only on a monthly basis.
3. Promoters: These customers often buy your products or services and are very loyal. Their affinity is strong enough that they promote your business on their networks and help your business grow through word of mouth.
Example: Anna just switched to a new CRM platform and heard from the sales team that it saves time and increases conversion. Ann is happy with these results and recommends it to all her social media followers.
4. Co-Creators: These customers are connected to the brand in such a way that they participate in the creation of value and receive value in return. 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 at using it. He decides to use the open-source platform to create add-on apps that he thinks will be useful to other users and posts them on the company’s app exchange.
A significant shift occurs when customers reach co-creation status with a brand. With Transactors, Supporters and Promoters, the company is responsible for meeting the needs of customers. However, when a company creates with its customers (typically by providing a technology platform that facilitates interactions and transactions), companies and customers create shared value.
To help you better understand where you and your customers fall on the customer affinity spectrum, take our Evaluation of the customer type. While there are many ways to segment customers, this type of segmentation is particularly useful because of its impact on the business model.
companies that shape it
Let’s look at three companies that have used digital capabilities to integrate customer co-creation into their business models. Both have moved away from allowing customers to design their own products, instead sharing values by acting as platforms to nurture the talents and assets of customer networks.
- Apple’s Developer Network: Apple provides the platform; Companies and individuals provide the applications. You each receive a portion of the value created, be it sales, awareness or benefit. 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 sold good – the real estate for rent. Revenue is shared and together Airbnb and its “hosts” have built a company that was last valued at more than $25 billion, more than Hyatt Hotels is worth.
- Lending Club: This peer-to-peer lending platform connects potential borrowers and lenders. All “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.
Customer co-creation is at the heart of Network Orchestration’s business model. Our research shows that companies that support a network of co-creators achieve two to four times higher shareholder value than companies that do not use co-creation business models. We see four main reasons for this value gap:
Bigger revenue growth: As co-creators, customers have an incentive to contribute to the growth of the company. Their success is theirs, whether it’s monetary or intangible rewards. Co-creation is less a measure of “customer loyalty” and more of an indicator of “mutual loyalty” where both parties serve each other.
Lower marginal cost: Their client co-creators bring a whole new set of assets to the company at very little 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-world assets (cars, homes, etc.) for the right incentives and shared value.
Improved customer insights: The increased customer intimacy that comes with co-creation deepens your understanding of your market and enables you to better serve it. When customers are involved and have a legitimate interest in its success, they are more willing to share personal information 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, allowing it to respond very quickly to changing customer needs. When a new vacation hotspot emerges, Airbnb doesn’t have to change its supply chain or buy new properties. Instead, his co-creation network is naturally expanding to meet demand.
Five steps to co-creation
Customers cannot be forced to participate. They must be eager participants in the equation of values. To drive co-creation, you need to invite your customers into the value equation. We recommend a five-step process called PIVOT: Locate, identify, visualize, operate and track.
1. Precise where your customers currently fall on the customer affinity spectrum and in which areas they are most interested in co-creation. Also rate your leadership team’s openness to co-creation.
2. Identify the characteristics of your key customer groups, including their 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 company to meet their own needs. Based on their characteristics, design a system that encourages them to participate, with a particular focus on using digital technologies as a platform.
4. Operate Your new co-creative digital company. Fund it, recruit the right digital talent, and insulate it from broader company politics. Experiment and iterate quickly.
5 track the performance of your co-creative customers and their added value. Add new metrics to standard financial reports, including revenue generated by customers and costs saved by their participation.
As written, these five steps appear relatively easy, but we all know that in practice they are far more difficult. The biggest hurdle to co-creation is usually changing the leadership team’s mental model. Most executives are so used to mastering the value creation process that they can’t think of customers as active participants rather than passive recipients.
Think of it this way: Does the hospital ask patients to help shape their own healthcare? Do professors allow college students to contribute to the curriculum? Are automakers allowing drivers to help design their next car? Generally no. But if they did, they could see a dramatic shift in engagement and innovation.
Giving up control and sharing rewards may seem terribly risky, but it’s the key to the co-creative business models that generate unprecedented value with lower marginal costs and higher profits. It is unwise to delay this journey any longer. Your customers are waiting.
Susan Korso contributed to this article. She is a leadership consultant at OpenMatters.