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How Retailers Can Invest in Customers Above Themselves: A Conversation with MIT Research Fellow Michael Schrage

Since large scale retail gained prominence in the 20th century, most retailers have been driven by one goal: to sell more products to more customers. To do this, retailers have invested in making shopping more convenient, more engaging, and cheaper, and used new tools and technologies to differentiate their buying experiences from their competitors.

More recently, many retailers have realized that they need to shift their mission. Rather than investing to improve their products or position in the market, they should invest instead in their customers. That’s the message research fellow at the MIT Initiative on the Digital Economy and author of “Who Do You Want Your Customers to Become?” Michael Schrage wants to convey to retailers. Schrage says that when planning future innovation investments, retailers should think of their customers first and foremost.

In a conversation with Sidecar, Schrage says that this idea is not entirely new. The most successful companies today have embraced this paradigm shift by making their customers more valuable to their business. Netflix, for example, has transformed consumers into movie and TV bingers through careful technology investments in recommendation engines and streaming. Subscribers who avidly watch Netflix’s programming and enthuse about their favorite shows with friends are far more valuable to Netflix than the average consumer.

In the following podcast, Schrage explains why retailers need to shift their thinking and provides insights into how they can better invest in customers. It’s not just about retailers embracing customer-centric strategies, says Schrage, it’s about creating better and more valuable customers so that retailers can thrive in an increasingly competitive industry.

Top Sound Bites

(edited for brevity and clarity)

On creating more valuable customers:

[3:35] I think if you really care about innovation, if you really are serious about new value creation, you don’t just look at the human capital of your employees, you look at the human capital of your customers, of your clients.

How can you look at innovation not just as a way of meeting the needs of your customers, or creating new value for your customers, but how can you look at innovation as an investment in the human capital capabilities and creativity of your customers? And that changes everything because if you make your customers more valuable, your firm becomes more valuable. And if you look at companies like Uber, Amazon, Netflix, Facebook, Google–these are firms that make investments that innovate in ways that make their customers more valuable and that in turn makes them more valuable. That’s huge.

On what retailers can learn from Netflix and Facebook:

[6:31] Netflix didn’t begin as a born-digital company. Netflix’s original delivery system was the U.S. Postal Service and they mailed the video disc to you. But what did Netflix understand? Netflix understood that with a huge variety of films, with a huge variety of video offerings, you have to give customers insight into stuff that they themselves would like. And when they switched from the postal service to streaming, they kept that recommendation sensibility. Who does Netflix want customers to become? Simple answer to that, binge watchers. . .

[7:37] Same sort of thing with Facebook. They are improving their customers, their users’ ability to share information, to connect with family, to connect with friends, to have a higher bandwidth, more richly articulated engagement with each other, to facilitate self-expression that becomes social expression. Their innovations are not just about satisfying the customer or meeting a customer need. They are about cultivating customer capability, making users more valuable.

On the evolution of loyalty programs:

[11:19] I don’t believe most retailers are thinking in terms of investing in their customers. I think they think in terms of investing in merchandise, merchandising, promotion, how do we sell? What’s one of the big lies that I’ve personally run across in my professional capacity? People talk about customer loyalty programs. That’s rubbish. That’s nonsense. It’s a lie. They’re not loyalty programs, they are promotion programs. Something is wrong with your culture, something is wrong with your honesty, something is wrong with your authenticity if you equate promotion and loyalty. . .

[14:17] I do believe that Amazon Prime really represents the first of the 21st-century loyalty programs, not a promotion program, a loyalty program. And I think one of the really interesting things going forward will be, will we see special Prime recommendations for customers like you? How will the Prime recommendation engine be different and distinct from the “regular Amazon recommendation engine”? How will things be customized and personalized for Prime individuals and Prime affiliates, Prime communities going forward? I think Amazon is in a fantastic position to redefine what loyalty means in the digital space.

On future opportunities in retail:

[29:57] What I’m most optimistic about is that there’s so many people who are passionate about retail, the shopping experience, the products and services that they’re selling, and that they want the customers and their clients and their prospects to experience that. I’m very, very happy that aesthetic sensibility and passion remains at the core, that it’s not just number crunching and going through the business.

And the other thing that I’m happy about is that the technology is becoming sufficiently adaptable, innovative, flexible, platform-like that it can amplify and enhance and focus that passion in a way that facilitates new business models and new value creation for both sides.

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