Designing Digital Experiences - SPECIAL COLLECTION - MIT ILP
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SPECIAL
COLLECTION
FROM THE LEADERSHIP ARCHIVE
Designing
Digital
Experiences
Business leaders are rightly looking
to digital technologies to reach new
and existing customers. But a solid
strategy is necessary when utilizing
these innovative technologies.
CONTENTS
SPECIAL
COLLECTION
Designing Digital Experiences
i Introduction
1 Architect Your Company for Agility
By Jeanne Ross
4 Why Design Thinking in Business Needs a Rethink
By Martin Kupp, Jamie Anderson, and Jörg Reckhenrich
7 Do You Have a Conversational Interface?
By Bala Iyer, Andrew Burgert, and Gerald C. Kane
10 Rethinking the Value of Customers in a Digital Economy
By Michael Schrage
14 When Customers Become Fans
By Jielin Dong and Yanli Zhang
16 Which Features Increase Customer Retention?
By Rebecca W. Hamilton, Roland T. Rust, and Chekitan S. Dev
22 A Data-Driven Approach to Customer Relationships
By Laura Winig
INTRODUCTION
Most companies are still learning how to design their digital selves for efficiency. This
collection of articles from MIT Sloan Management Review examines how organizations
are thinking about designing their processes, systems, and data in ways that discipline
their core operations.
From “Architect Your Company for Agility”:
• In the digital economy, speed matters.
• To keep pace with customer demands and competitor moves, companies must be able to quickly
experiment with a potential offering and, depending on customer response, continually enrich
and scale that offering, or discard it and move on to the next experiment.
• Innovating at speed means utilizing empowered teams that are aligned to achieve company-wide
objectives. Growing numbers of companies are creating cross-functional, agile teams that each
own delivery of a digital offering or a set of services contributing to an offering. Typically, teams
clarify their own objectives and define their own metrics for success.
• Spotify, the digital music service, is a model for many companies’ forays into empowered teams.
Spotify’s small teams, called squads, release new digital features and offerings as quickly as they
become viable rather than following a timeline with regularly scheduled release dates. Rapid
innovation depends on teams learning quickly what does and doesn’t work. Empowered teams
experiment, and the best teams learn how to rapidly respond to the outcomes of their experiments.
From “Why Design Thinking in Business Needs a Rethink”:
• “Design thinking” has become popular in many industries as established companies try to apply
designers’ problem-solving techniques to corporate innovation processes.
• Key elements of the design thinking methodology include fast iterations, early and frequent
interaction with customers, agile process design with minimal hierarchy, and a learn-by-doing
approach that involves building prototypes and creating mock-ups of any kind as early as possible
in the process.
• But design thinking initiatives rarely proceed according to the textbook model. Innovation is an
inherently messy process, and it often conflicts with established processes, structures, and
corporate cultures.
• To avoid the most common pitfalls, companies need to encourage top managers to champion
design thinking initiatives with egalitarian, self-organized teams, and to empower those teams
to act without getting permission for every tiny step.
From “Do You Have a Conversational Interface?”:
• Customer interactions with brands will soon become managed by artificial intelligence via
messaging platforms — and companies need to be ready.
• Conversational interfaces within messaging platforms such as Facebook Messenger, Slack,
SPECIAL COLLECTION • “FITTING SOCIAL MEDIA INTO YOUR STRATEGY”• MIT SLOAN MANAGEMENT REVIEW i
Skype, WeChat, Kik, and Telegram allow companies to chat with their users.
• The arrival of AI-powered bots has turned mobile chat platforms into powerful tools for sense-
making and commerce. Bots use machine learning techniques to understand text-based
communications and provide better responses to user queries.
• For example, imagine discussing a visit to Boston in a chat with a business partner via Messenger.
Using machine earning algorithms, a bot could recognize that you are talking about travel and
initiate a transaction with your favorite travel app, such as Expedia, or offer a link for a ride
through Lyft. The messaging platform becomes a distribution channel for software and services
— without leaving the conversation.
From “Rethinking the Value of Customers in a Digital Economy”:
• Network effects are the “secret sauce” for platform companies like Apple, Facebook, Amazon,
Airbnb, and LinkedIn, where the value of a product or service to users increases as the number of
users grows.
• For example, as media “infopreneur” Tim O’Reilly has noted, “Google gets smarter every time
someone makes a link on the web. Google gets smarter every time someone makes a search. It
gets smarter every time someone clicks on an ad. And it immediately acts on that information to
improve the experience for everyone else.”
• The economic and business insight should be obvious: Network effects turn users/customers
into assets.
• Businesses can give customers new capabilities and skills that collectively create virtuous cycles
of value creation. This Triple-S framework — segment, socialize, and skill-ify — has had
enormous impact in helping traditional marketing and innovation people create and capture the
benefits of network effects.
From “When Customers Become Fans”:
• The Chinese technology company Xiaomi cultivates a close connection with its customers
through a product development process that invites user participation.
• Xiaomi’s Android-based user interface, MIUI, was tested by volunteer fans.
• Customer involvement in the product development life cycle reduced R&D costs and cultivated a
sense of participation and pride among tech-savvy lead users. Because of such enthusiasm, when
Xiaomi unveiled a mobile phone in 2011, there were already 300,000 MIUI users.
• Xiaomi has continued to cultivate its most enthusiastic customers — known as “Mi Fans” —
through social media and fan clubs. In 2014, the company had more than 10 million registered
users, generating more than 1 million visits and more than 250,000 posts every day.
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From “Which Features Increase Customer Retention?”:
• Customer lifetime value is the net profit a company earns over the course of its relationship with
a customer. To maximize customer lifetime value, a company must first convince people to buy
its product or service once — and then retain them as long-term customers.
• Businesses often invest in expensive features without adequately understanding that the features
that attract new customers may differ from those that will retain existing ones.
• dding too many features can actually decrease customer satisfaction. In one study, participants
A
were initially more inclined to choose a digital video player that had 21 features over one that had
seven. However, those who picked the 21-feature video player ended up less satisfied than those
who used the seven-feature model. Although having more features increased initial choice,
“feature fatigue” had the opposite effect on customer retention.
• Companies should consider how to measure the effect that adding a new feature will have on
customer retention.
From “A Data-Driven Approach to Customer Relationships”:
• South African bank Nedbank leverages its access to a rich trove of transactional data from credit
card use to help merchants make strategic decisions to better serve those customers.
• A case study of Nedbank by MIT Sloan Management Review found that, by looking at details such
as the time of transactions, the size of purchases, retailer locations, and specifics like the age,
gender, and income bracket of some users, Nedbank could help its merchant clients understand
their own customers’ shopping patterns.
• Nedbank moved into this data-crunching business niche after betting that its data could provide
deep insights that would help its merchant clients understand their own businesses. The bank
reasoned that its data could be better than the market data those merchants were already
purchasing on the open market.
• The case study notes that the bank developed its data analytics tool for competitive differentiation.
Although it had a 20% share of South Africa’s acquiring market, Nedbank had concluded that it
would have to enhance its value-added services if it wanted to sustain that business.
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Architect Your Company for Agility
JEANNE ROSS
because so many organizational elements must be
synchronized to deliver an integrated solution. And it’s
not just the number of organizational elements that
makes digital strategy execution difficult. Speed matters.
To keep pace with customer demands and competitor
moves, companies must be able to quickly experiment
with a potential offering and, depending on customer
response, continuously enrich and scale that offering, or
discard it and move on to the next experiment.
In other words, business architecture just became more
important — and more difficult. In the pre-digital
economy, business architecture most often focused on
operational efficiency — designing seamless end-to-end
business processes. That is no longer sufficient. In the
digital economy, business architecture must also focus on
agility — designing rapid reuse of individual business
Recent operational issues at Tesla Inc., the future-forward components.
electric-car maker based in California, serve as a
Organizational agility won’t happen by accident. It must
reminder that a great strategy is valuable only if a
be architected.
company is capable of executing that strategy. And
whether or not a company can execute its strategy
depends largely on whether it is designed to do so. In Innovating at Speed
other words, it depends on business architecture — the Means Utilizing
way a company’s people, processes, systems, and data
interact to deliver goods and services to customers. Empowered Teams
To facilitate speed, companies must design themselves to
As companies now develop digital strategies, they are minimize the obstacles to getting work done. This
invariably promising integrated customer solutions. requires empowering and supporting problem-solvers.
These strategies will be especially difficult to execute
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To tthi
hiss en
endd, ggrrowin
ingg n
num
umbbererss ooff co
commpanies aarre cr
creeatin
ingg The Critical Role of
sm
smaall, cr
cros
oss-f
s-fun
uncctio
ion
nal, aaggile tteeams. Each team owns
delivery of a digital offering or a set of services Alignment
contributing to an offering. Typically, teams clarify their Empowered teams invariably contribute innovation —
own objectives and define their metrics for success. and high energy — to companies. The challenge is
ensuring that the efforts of individual teams align to
Spotify AB, the digital music service, serves as a model achieve company-wide objectives. Our research at the
for many companies’ forays into empowered teams. The MIT Center for Information Systems Research has
Stockholm-based company relies on small teams, called identified three mechanisms for achieving alignment: (1)
squads, to deliver product features and related business clear missions, (2) common business components, and
components. Squads are assembled into tribes that (3) fruitful knowledge sharing.
provide major offerings and capabilities, such as online
music offerings or services in support of artists or Missio
sionns pprrovide dir
direectio
ion,
n, bbooth aatt tth
he en
entter
erpprise aan
nd aatt
advertisers. the in
indi
divvid
iduual tteeam le
levvel. At the enterprise level, a clear
mission or vision statement establishes priorities for the
Th
Thee co
conncept
cept ooff cocon
ntin
inuo
uou
us rreele
leaase iiss es
esssen
enttial ttoo tth
he entire organization. It directs teams’ innovation efforts by
ef
efffectiven
enes
esss ooff em
emppowerereed tteeams. At Spotify, squads clarifying the objectives of the company’s investments in
release new digital features and offerings as quickly as resources. At the team level, mission statements define
they become viable rather than conform to scheduled how the team will contribute to the company’s goals.
release dates. Rapid innovation depends on teams
learning quickly what does and doesn’t work. Empowered At Spotify, managers told us that the company defines a
teams experiment, and the best teams learn how to small set of “big bets” that establishes enterprise priorities
rapidly respond to the outcomes of their experiments. based on beliefs managers derive from their data.
Individual teams then state missions to help achieve the
Th
Thesesee tteeams do
donn’t ffeear fa
faiilur
uree. In fact, critical to the big bets. For example, the mission of a music delivery
concept of empowered teams is that when experiments tribe is “providing fast and reliable access to all the
fail, company managers do not assume responsibility for world’s music.” The mission of an infrastructure tribe is
dictating how to fix things. Instead, they act as coaches, “enabling high product development speed while
posing questions and eliciting hypotheses and expected maintaining a highly available service.” A clear mission
outcomes. will guide a team’s choice of metrics, so that the team can
easily track its progress in contributing to the enterprise
Failed experiments are essential to learning. If an entire
mission.
concept is deemed a failure, the team can be disbanded
and reassigned to a new initiative. This helps to keep To respond to changes in customer needs or market
team formation fluid. Unlike traditional organizational conditions, companies can redefine missions at the
structures, a design built on empowered teams is in a enterprise or individual team level. Restating a mission
constant state of change.
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enables a company to adjust priorities without necessarily Guilds bring together people with common interests to
requiring changes in organizational structures. share the latest discoveries in their domain and develop
specialized skills. Agile coaches, who facilitate team
To en
enssure
ure aalig
lignm
nmen
entt acros
acrosss tteeams, com
companies n
neeed ttoo dynamics, can recommend best practices observed in one
em
embbrace rreu
eusse. Reusable business components such as squad to others.
on-boarding processes, dashboarding, and payment
systems, facilitate integration and speed. New business Other companies rely on weekly stand-up meetings where
capabilities build on existing capabilities and provide teams inform each other — and other people in the
consistency across offerings. company — about their deliverables and learning. And
many companies provide collaboration tools for
For example, the Dutch electronics company Philips is communicating within and across companies. These tools
building digital offerings to enable seamless health care are designed to provide transparency and move away
for its hospital clients in accordance with a vision to from command-and-control approaches that attempt to
“build a healthier tomorrow.” To support this effort, an distribute information only on a need-to-know basis.
internal platform team reviews all propositions for new Although initial attempts to provide transparency can
digital offerings to distinguish unique business needs lead to concerns of information overload, people on
from common needs. The team then establishes a road empowered teams eventually learn which people and
map to ensure that common business components are tools are the most valuable — and therefore which to pay
available when needed. the most attention to.
Technical standards are essential to business component
reuse. Standards for application programming interface Learning How to
(API) development, for instance, ensure that teams Architect Your Business
approach development of their business components so
Most companies are still learning how to architect for
that they are API-enabled and available through the
efficiency. To do so, they must design people, processes,
company’s catalogue of internal services.
systems, and data that discipline their core operations.
Fina
inally, em
emppowere
ered tteeams depen
depend d oon
n kkn
nowleledg
dgee ssh
harin
ingg
As they learn to architect for efficiency, however,
to coo
co ordina
dinate tth
heir act
ac tivities aan
nd ssh
hare tth
heir lea
le arnin
ningg. It
companies must also start learning how to architect for
appears that when it comes to sharing knowledge, the
agility. This means designing empowered teams, as well as
more mechanisms a company deploys, the better.
the systems, data, and processes that ensure the
Spotify relies on what it calls chapters, guilds, and agile synchronization of individual teams’ efforts. These
coaches. Every Spotify squad member is assigned to a business architecture efforts will ultimately allow for
chapter, which is usually organized around a single rapid delivery of integrated customer solutions.
competency, such as graphical design or back-end
About the Author
development. Chapter members meet to discuss issues
and ideas specific to their roles, which leads to more Jeanne Ross is principal research scientist for MIT’s
coherent technical decisions. Center for Information Systems Research. Follow CISR
on @mit_cisr.
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Why Design Thinking in
Business Needs a Rethink
To reach its full potential, the popular innovation methodology must be more
closely aligned with the realities and social dynamics of established businesses.
BY MARTIN KUPP, JAMIE ANDERSON, AND JÖRG RECKHENRICH
IN RECENT YEARS, “design thinking” has become popular in many industries as established companies have tried to apply designers’
problem-solving techniques to corporate innovation processes.1 Key elements of the design thinking methodology include fast iterations;
early and frequent interaction with customers; agile process design with less hierarchy; and a learning-by-doing approach that involves
building prototypes and creating mock-ups of any kind as early as possible in the process.
Here’s how design thinking initiatives are supposed to unfold in a corporate setting: A clearly defined innovation challenge is pre-
sented to a team trained in design thinking. The team conducts research to better understand the problem. Drawing on their insights,
they propose a variety of solutions, start building prototypes, and in the end, identify a fresh, profitable business opportunity.
That’s how the process is supposed to work — but it hardly ever does. Over the past seven years, we have helped more than 20 companies
pursue more than 50 design thinking initiatives and have found that such initiatives rarely proceed according to the textbook model.
Innovation is an inherently messy process, made even messier because it conflicts in many ways with established processes, structures,
and corporate cultures. Fortunately, once you understand the challenges, you can avoid the most common pitfalls.
The root of most of the problems is the disconnect leaders often supervise 12 to 15 design thinking
between design thinking and conventional business projects at a time. This maximizes the leader’s time
processes. After all, most companies’ successes are but reduces the teams’ efficiency, hinders passion
built on delivering predictable products by repeatable and commitment, and slows progress.
means. That means organizations almost instinctively In many companies, four cultural factors tend to
resist bringing fuzzy, messy, and abstract vision into aggravate these structural limitations:
the equation. This antipathy toward design thinking
runs deep, all the way from the C-suite to line workers. Specialization Specialization often leads to a tacit
We find that employees often try to dodge design agreement that makes certain tasks the territory of
thinking assignments, shying away from the habits certain departments. This has two effects on design
and mindsets the methodology requires. thinking. First, participants from different depart-
The organization of the teams themselves leads ments often have difficulty communicating
to a second difficulty. The design thinking method- because of their very specific viewpoints. Second,
ology calls for egalitarian, self-organized teams, but many people who belong to departments that are
this isn’t how most established large companies traditionally considered less creative, such as ac-
work. In fact, the design thinking teams we have counting or internal audit, suffer from low levels of
studied tend to have clear process and project own- what management thinkers David and Tom Kelley
ers, usually senior managers. These managers not call “creative confidence.” 2 If you’ve never been
only supervise the design thinking project but also encouraged to see innovation as part of your job
assign tasks to team members and are responsible and have been told that you’re no good at it, you’ll
for its outcome. To make things worse, these senior probably take people’s word for it. This may reduce
42 MIT SLOAN MANAGEMENT REVIEW FALL 2017 SLOANREVIEW.MIT.EDU
SPECIAL COLLECTION • “FITTING SOCIAL MEDIA INTO YOUR STRATEGY”• MIT SLOAN MANAGEMENT REVIEW 4THE LEADING
QUESTION
What chal-
lenges do
design think-
ing initiatives
in big compa-
nies face?
FINDINGS
Organizations
whose success is
built on predictable
operations instinc-
tively resist fuzzy
and messy innova-
tion processes.
Many established
companies punish
failure, which
discourages the
risk-taking that
design thinking
requires.
Design thinking
teams need a lot
of autonomy to
function well.
friction and make the organization function more behavior in one product category. Instead of formu-
comfortably, but it also reduces the chance of a cre- lating useful hypotheses, participants developed
ative spark. ones that were so broad and unspecific that they
would be impossible to test. We soon realized that
Human Speed Bumps Managers in some depart- the workshop attendees were avoiding mistakes for
ments (particularly legal, compliance, and regulatory which they could be held accountable. Unfortu-
affairs) tend to see their role as basically to stop nately, reducing their personal risk of failure meant
things from happening. To get the most out of a de- reducing their collective chance of success.
sign thinking exercise, people in these departments Our research suggests that companies need to
must embrace a can-do attitude and focus their cre- take five steps to take full advantage of the potential
ative energies on exploring how else things can be of design thinking:
done. It takes a special kind of leadership to enable 1. Encourage top managers to champion design
this supportive culture in traditionally conservative thinking initiatives. We find that design thinking
and risk-averse functional domains. teams require two kinds of attention by top manage-
ment: proactive and follow-up. Proactive attention
Focus on Monetary Results In projects with a high comes in many forms, such as launching an initia-
degree of novelty, the expectation should be around tive, taking part in the process, developing and
the amount of learning that takes place, not the result. submitting ideas, and removing obstacles. Follow-up
Focusing too early on monetary results (or other met- attention is the energy the leader invests after the de-
rics) can discourage creativity — and ironically, sign thinking team does its work, such as pushing
reduce the chances of a profitable long-term result. ideas through the organization and sometimes giv-
ing explicit feedback when ideas are not pursued.
Failure Phobia Many established companies pun- Such behaviors can help embed and sustain design
ish failure, which discourages the risk-taking design thinking in established organizations.
thinking requires. In a workshop with a large con- However, the biggest limiting factor is that man-
sumer goods company, we asked participants to agers are spread far too thin. Rather than try to
formulate hypotheses regarding consumers’ buying monitor the progress of 12 to 15 design thinking
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initiatives, managers are better off pursuing a single learning. By clearly defining learning outcomes
design thinking goal at a time. through questions (such as “Why don’t patients
2. Balance the teams. Balancing intuitive and sign the consent form?”), you can then define pre-
analytical thinking is one of the biggest challenges cise hypotheses (such as “because the form is too
when establishing an innovative culture. Such long” or “because the language is incomprehensi-
teams are very tricky for established organizations ble”). Even if the overall project fails, the captured
to manage, as it is difficult to allow people freedom learning will lead you to a better question or an-
while at the same time ensuring that they don’t lose other project.
focus on other important business goals.
One key is for team members to recognize and Supporting Design Thinking
appreciate the diversity of their experience and Too many enterprises have naively invested in
skills. For example, some members might focus training employees in design thinking methodolo-
more on workshop facilitation, whereas others may gies, and then been disappointed when they don’t
use their personal networks within the company to see a tangible impact on innovation outcomes. In-
identify potential projects. The teams should in- novation is an inherently social process that
clude all pertinent functions, including marketing, involves not only inventing but also convincing
sales, product management, and research and people to do something in a new way. To be success-
development. ful, a design thinking program must be closely
3. Set ground rules. Design thinking teams need linked with the organization’s social dynamics.
a lot of autonomy to function well. They should be Without the right supporting mechanisms, you
empowered to act without getting permission for probably won’t achieve the desired results.
every tiny step. A good way to do this is to set mini-
mal rules for the team, for example, by writing Martin Kupp is an associate professor of entrepreneur-
ship and strategy at the Paris campus of ESCP Europe.
a list of five things they are not allowed to do, such Jamie Anderson is an adjunct professor of strategic
as endanger brand perception or engage in illegal management at the Antwerp Management School in
Antwerp, Belgium. Jörg Reckhenrich is an artist based
activities. Everything else, by default, they are
in Berlin as well as a faculty member of CEIBS Zurich
allowed to do. Institute of Business Education in Switzerland. Com-
4. Integrate design thinking into product- ment on this article at http://sloanreview.mit.edu/59113,
or contact the authors at smrfeedback@mit.edu.
development processes. Design thinking is often
treated as yet another assignment from headquar-
REFERENCES
ters — just one more box to be checked. To change
that perception, the teams responsible for design 1. Peter G. Rowe’s book “Design Thinking,” published
in 1987, was the first publication to use the term. The
thinking should look more closely at their existing book described a systematic approach to problem-solving
product-development processes. It can be helpful used by architects and urban planners. The application of
to integrate specific design thinking deliverables, design thinking methodologies beyond architecture
emerged in the 2000s; instrumental in this were works by
such as early customer feedback in the problem- Tim Brown and by Roger L. Martin. See P.G. Rowe, “De-
definition phase, larger-scale customer feedback in sign Thinking” (Cambridge, Massachusetts: MIT Press,
the market-solution phase, and prototypes and 1987); T. Brown, “Design Thinking,” Harvard Business
Review 86, no. 6 (June 2008): 84-92; T. Brown, “Change
mock-ups throughout the process. Linking design by Design: How Design Thinking Transforms Organiza-
thinking to innovation strategy should make it eas- tions and Inspires Innovation” (New York: HarperCollins,
ier to measure the influence of design thinking on 2009); and R.L. Martin, “The Design of Business: Why
Design Thinking Is the Next Competitive Advantage”
the quality and market fit of new products and (Boston, Massachusetts: Harvard Business Press, 2009).
services. More stakeholders will then see it as an 2. T. Kelley and D. Kelley, “Creative Confidence: Unleash-
integral part of product development, and not a ing the Creative Potential Within Us All” (New York:
parallel process. Crown Business, 2013).
5. Redefine the metrics. Because design think- Reprint 59113.
ing is about the early phase of the innovation Copyright © Massachusetts Institute of Technology, 2017.
process, teams should focus not on profit but on All rights reserved.
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Do You Have a Conversational Interface?
BALA IYER, ANDREW BURGERT, AND GERALD C. KANE
Customer interactions with brands will soon become managed by AI via messaging
platforms — and companies need to be ready.
messaging, or natural language interfaces to interact with
people, brands, services, and bots. This shift is currently
evidenced by the massive adoption of messaging apps
such as Facebook Messenger, Echo, and WhatsApp,
which together host more than 60 billion messages daily.
According to eMarketer, messaging apps will reach 2
billion people within a few years. WhatsApp users average
nearly 200 minutes each week using the service, and
many teenagers now spend more time on smartphones
sending instant messages than perusing social networks.
Messaging platforms can also alter the way businesses can
communicate with their customers. Currently,
conversational interfaces within well-known messaging
platforms such as Facebook Messenger, Slack, Skype,
WeChat, Kik, and Telegram allow companies to chat with
their users.
We live in the age of mobile applications. There are
currently several million apps available. This profusion of Bots as Conversation
choices means it can be difficult for users not only to
choose which apps to download, but to manage them all
Partners
— a phenomenon we call “app fatigue.” This situation While mobile chat platforms are interesting, the arrival of
creates both a need and an opportunity to engage users artificial intelligence-powered engines called bots have
on a single platform. Today, that platform is increasingly made them a powerful tool for sense-making and
becoming messaging apps. commerce. Bots use machine-learning techniques to
understand text and provide better responses to user
We think the next era will belong to “the conversational queries. They are present in the background, and they
layer” — both text- and voice-driven — that will use chat, make sense of the conversations taking place and convert
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them into actions using apps, such as scheduling a typically uses (intent, words, shortcuts, emojis, etc.).
meeting or ordering a pizza. For example, imagine you Companies need to strengthen these natural language
are chatting with your business partner using Messenger capabilities in their products, apps, and bots to allow
and discussing a visit to a client site in Boston. Using users to communicate with them with ease.
machine-learning algorithms, a bot can recognize that
you are talking about travel and initiate a transaction with Individuals will begin to welcome and even expect this
your favorite travel app, such as Expedia, or offer a link type of service from brands, but companies must
for a ride through Uber. The messaging platform remember that this trusted personal space is precious.
effectively becomes a distribution channel for software Poorly designed interactions can irreparably damage the
and services without leaving the conversation. customer relationship. For example, when Microsoft’s Tay
posted racist remarks on Twitter, it had to be shut down
1-800-Flowers recently launched such an experience on temporarily. The bot industry as a whole has yet to come
Facebook Messenger and has since expanded to Amazon up with the “killer bot” that tips the scale for wider
Alexa and the IBM Watson platforms. Customers can adoption, but bots continue to grow in sophistication and
order flowers directly from their experience in these power.
conversational layers. 1-800-Flowers is very focused on
customer support and maintaining a relationship with What Should Companies
their customers, so the company jumped at the
opportunity to be one of the first in the space. Of the tens
Do Today?
of thousands of people who have ordered flowers through Pic
ickk a p
pllatform. When reaching users, a brand needs to
the chatbot integration, more than 70% are new understand where current or potential customers spend
customers — and these new customers skew toward their chat time. The platform choice is an important early
younger demographics than the company’s existing decision. This is similar to how brands and engineering
customers. teams initially opted to launch their products on iOS,
then Android, and other mobile OS platforms early on. In
What Should Companies order to reach user conversations today, brands will need
to decide which platforms to target and build on.
Expect? Different platforms have a diverse set of capabilities (i.e.,
Companies should position themselves for the user identity, cards, and buttons on Messenger, and work
conversational layer to be more widespread five to 10 team and slash commands on Slack) and demographics
years from now. Individual users will most likely want to target.
interact with trusted brands to fulfill their needs through
natural language interactions. This interaction will occur Run ssttra
ratteg
egic
ic exp
exper
erim
imen
ents.
ts. It is not clear if customers
at the exact time the user demands a product or service, would use the conversational layer for quick responses or
and in the exact terms she thinks of that product or for broader conversations. Brands like Amex Finance are
service, in the language and communication methods she using chatbots to provide notifications to customers
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about their new products or alerts about forthcoming machine-learning techniques, the bot was able to handle
travel dates. These limited experiments would allow 97% of the student queries. In online education, where
Amex to set the bar for the nature of interaction with dropout rates are quite high, a high level of engagement
clients. The enterprise social networking platform Slack is with a “tutor” could make a huge difference in retention.
using chatbots to automate routine managerial check-ins,
reducing the need for meetings. Pilo
lott bboots w
wiith yyoour ccu
ustomer
ers.
s. Many of the tools that are
provided by the messaging and bot platform providers are
Look ffoor inn
innoova
vattive u
usses in ootther sseectors. Simple from the open-source space, and companies can perform
examples like ordering airline tickets or pizzas are low-cost experiments with a reduced set of users to learn
emerging. However, sophisticated bots that understand more about conversational interactions and use cases that
the context and make intelligent decisions have not yet yield the desired results.
been developed. In fact, recent articles on automated
email assistants have shown that they rely too much on The conversational layer of computing may have not yet
human intervention. fully arrived, but it is coming. Companies should begin
thinking and experimenting now about how to use these
Companies can also learn from examples outside their new avenues to support their brand and their business
industry. For example, a Georgia Tech professor used a today, so they can be ready for that conversational future
bot as a teaching assistant for a programming class. Using as users demand and engage with this type of experience.
About the Authors
Bala Iyer is a professor and chair of the Technology,
Operations, and Information Management Division at
Babson College in Wellesley, Massachusetts. He can be
reached on Twitter at @BalaIyer. Andrew Burgert is the
CEO of Azumo, a San Francisco-based data and AI
development firm. He can be reached on Twitter at
@andrewburgert. Gerald C. (Jerry) Kane is an associate
professor of information systems at the Carroll School of
Management at Boston College and the MIT Sloan
Management Review guest editor for the Digital Business
Initiative. He can be reached at
gerald.kane@bc.edu and on Twitter at @profkane.
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Rethinking the Value of Customers in a Digital
Economy
MICHAEL SCHRAGE
Research by Michael Schrage from MIT’s Initiative on the Digital Economy offers
new insights into platform markets and network effects.
Customers, customer-centric marketers declare, are king. network effects as a competitive edge and innovation
Businesses consequently ignore customer behaviors at resource.
their own risk. But the power and potential of network
effects suggests that seeing customers as royalty may Technically, economists say network effects — known
prove a poor idea and an even worse investment. also as network externalities — exist when the value of a
product or service to users increases as the number of
Successful platform companies and competitors see their users grows. But this traditional definition is woefully
customers and clients as assets worthy of innovative incomplete. Quality of use — and users — matters as
investment. Yes, treat customers very, very well, but invest much or more to value creation as quantity. In other
smartly to make them even better. In Uber’s business words, how networks are used is as important as how
model, for example, smart apps make both the company’s much they are used.
customers and drivers more valuable to both Uber and
each other. In fact, the ability to creatively invest in one’s Amazon, for example, may have hundreds of millions of
customers as a result of digital networks is central to our customers shopping for goods, but the fact that tens of
new research, Rethinking Networks: Exploring Strategies millions of those customers actively browse through
for Making Users More Valuable. recommendation engine suggestions and customer
reviews, sample book and video content, and write
As platform companies like Google, Apple, Facebook, comments and reviews themselves, contributes
Uber, Amazon, Airbnb, and LinkedIn relentlessly disrupt enormously to the company’s value. Amazon’s network
— and redefine — mainstream industries, we see network facilitates the creation and capture of data proffering
effects as their “secret sauce” for success. Network effects insights into customers and products alike. These
increasingly determine innovation opportunity, value qualitative insights have quantitative impact for both
creation, and growth in digital markets. This holds true Amazon and its customers.
for Netflix, Twitter, Github and Alibaba — as well as the
so-called Internet of Things — that all rely heavily upon
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Tapping into Network someone clicks on an ad. And it immediately acts on that
information to improve the experience for everyone else.”
Effects
The crucial economic and business insight should be This same design sensibility holds true for browsing
obvious: Network effects turn users into assets. Enabling Amazon and Netflix recommendations; hailing — or
network effects empowers users/customers to both driving — an Uber; seeking — or offering — Airbnb
directly and indirectly create new value. Network effects accommodation; and utilizing smartphone apps to get
don’t merely create more value for more users, they make something done. The more users participate, and the
users more valuable to both the enterprise and to each more innovatively they engage, the more value — and
other. Network effects, therefore, are special economic valuable data and experiences — can quickly be
phenomena because they make their contributors more generated. In turn, the more value created, the more users
valuable to everyone in and on the network. — and innovative uses — materialize. As my MIT
Initiative on the Digital Economy (IDE) colleagues Erik
Brynjolfsson and Andrew McAfee have observed, this
constitutes the raw materials for combinatorial
innovation.
Another way to say this is making users better makes
better users. That investment philosophy helps define the
tools, techniques, and technologies that improve usability
and participation. For instance: How might data-driven
advice or an innovative app make network participation
more productive? Additionally, our research considers
how platform businesses can use digital technology and
social media to make customers more valued to the
business and more valuable in customer’s own eyes, as
well. When developing platforms, how can — and should
— businesses segment users and facilitate how they share
information and insights with each other?
Indeed, as media infopreneur Tim O’Reilly, who coined A Framework for Value
the term Web 2.0, incisively observed: “A true Web 2.0
application is one that gets better the more people use it.
Creation
We also look at how businesses can give users new
[For example] Google gets smarter every time someone
capabilities and skills that collectively create virtuous
makes a link on the web. Google gets smarter every time
cycles of value creation. What we call the Triple-S
someone makes a search. It gets smarter every time
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framework– Segment, Socialize, and Skill-ify –has had — to share, they must decide how they want to
enormous impact in helping traditional marketing and measure their Return on Network Effects (RONE).
innovation people create and capture the benefits of
network effects. • Skill-ific
l-ificaatio
ionn is about creating new capabilities in users
and user communities. Sharing and editing imagery,
for example, represents a capability that goes beyond
Figur
iguree 1. Th
Thee V
Vir
irttuo
uouus S-C
S-Cyycle sharing and editing text. Skill-ification means
The enterprise value proposition: Segmentation, enhancing human capital.
socialization and skill-ification.
The deliberate interdependencies among these three
themes is central to the framework’s effectiveness.
Explicitly linking Skill-ification to Socialization to
Segmentation provides a potent method for examining
network effects. Managing them each independently or
functionally is a recipe for failure.
In two-sided markets, such as Apple’s App Store, Uber,
and Airbnb, the framework is as important for the
The ‘Triple-S’ research framework asks executives to developer/supplier side as for customers and clients. Uber
deconstruct network effects into three interrelated drivers and iPhone app developers benefit as much as
components: Segmentation, socialization, and skill- Google searchers and LinkedIn job hunters from
ification, as follows. investments that improve their skills and capabilities. The
digital access, algorithms, and analytics that measurably
• Seg
egmmen
enttatio
ionn.Organizations identify specific user
enhance individual performance on a network
segments — such as customers, channels, developers or
simultaneously facilitate and accelerate network effects.
suppliers — they deem particularly important or
Taken together, these represent a new genre of
valuable. For example, they could choose to segment
productivity.
customers who make the most referrals; the suppliers
who propose the most innovations; or the channels Understanding the impact of network effects should
that enjoy the most loyalty. The 80/20 Pareto Principle fundamentally shift strategic investment perspectives
is a popular discriminator; for instance, which 20% of toward investing in one’s users. As noted, in digital
customers are the most profitable. In short, which users economies, sustainable success comes not just from
do the organization want to target, invest in, and create improving products, services, and user experiences, but
network effects around? from improving customers, clients, channels, and
suppliers, as well. Networks make that possible and
• Soci
ciaaliza
lizattio
ionn. Different social media platforms likely
affordable. The next step is for marketing and innovation
facilitate different kinds of network effects at every
business — choosing Facebook over Pinterest or
LinkedIn over Yammer. Organizations not only need to
define how they want users — and user communities
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executives to explicitly address key questions about facilitate value creation. As my MIT IDE research
assessing returns on their network-effects investments colleague and collaborator Marshall van Alstyne has
and making it easier for users to participate and create observed, network effects are about “customers creating
connections. value for other customers.”
The clear top-management concern must be how boards If customers are viewed as king in today’s platform
of directors and executive committees effectively oversee markets, it’s only because the kingdoms they rule are now
network effects as an organizing principle and an asset for larger and more valuable thanks to their networked
the digital enterprise. Network-effects management is as nature.
important as risk or R&D management for platform
companies. Our research also suggests that network
effects, arguably, may be the most cost-effective way to
About the Author
Michael Schrage is a Research Fellow at the MIT
Initiative on the Digital Economy (IDE) and a Visiting
Fellow at the Imperial College Department of Innovation
and Entrepreneurship. He is author, most recently of the
Innovator’s Hypothesis, and is a columnist for Fortune,
CIO Magazine, and MIT’s Technology Review, and a
regular contributor to The Conference Board Review.
Michael is a senior advisor to MIT’s Security Studies
Program and is on the MIT Executive Education faculty.
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SPECIAL COLLECTION • “FITTING SOCIAL MEDIA INTO YOUR STRATEGY”• MIT SLOAN MANAGEMENT REVIEW 13I N N O VAT I O N S T R AT E G Y
When Customers
Become Fans
The Chinese technology company Xiaomi cultivates a close connection with its
customers through a product development process that invites user participation —
as well as through social media and fan clubs.
BY JIELIN DONG AND YANLI ZHANG
Xiaomi Inc., whose
cofounders are shown
IN LESS THAN six years, Beijing-based Xiaomi user-centered and open innovation, harnessing the
here, has actively Inc. has become one of the world’s leading smart- energies of enthusiastic customers known as
involved enthusiastic
customers — known phone makers. One key factor is that the company “Mi Fans.” Xiaomi actively involves “Mi Fans” in
as “Mi Fans” — in both
software and hardware offers its phones to customers in China at lower both software and hardware development pro-
development processes. prices than competitors like Apple Inc. — and sells cesses. For example, Xiaomi’s Android-based user
mainly via e-commerce to keep costs low. interface MIUI went through a fast-iteration devel-
But Xiaomi has done more than just keep costs opment process. Xiaomi put the first version of
down; it has also cultivated user pride through MIUI online in August 2010 (Continued on page 95)
MIT Sloan Management Review (ISSN 1532-9194) is published quarterly by the Massachusetts Institute of Technology at the MIT Sloan School of Management. Periodicals postage paid at
Boston, MA, and additional mailing offices. POSTMASTER: Send address changes to MIT Sloan Management Review, PO Box 8500, Big Sandy, TX 75755, USA. Canadian GST No. 12761 8635
RT0001. Copyright © Massachusetts Institute of Technology, 2016. All rights reserved.
96 MIT SLOAN MANAGEMENT REVIEW WINTER 2016 COURTESY OF XIAOMI INC.
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When Customers Become Fans (Continued from page 96) To further build a sense of connection with cus-
and set up an Internet forum to communicate with tomers, Xiaomi has designed off-line programs
a group of tech-savvy users. In the first week, Xiaomi that arrange for the company’s high-ranking exec-
got 100 users who volunteered to test MIUI. Since utives to meet with users in certain cities at
then, Xiaomi has been releasing improved versions irregular intervals in a lively and interesting atmo-
weekly for a group of its lead users. Customer in- sphere. Plus, Xiaomi fans in many cities have
volvement in the product development life cycle has voluntarily organized local Xiaomi fan clubs. The
not only helped Xiaomi reduce R&D costs but also company keeps in close touch with these clubs and
enabled the company to cultivate a sense of partici- provides support for their off-line events. This is a
pation and pride among tech-savvy lead users. They, way for Xiaomi fans to communicate with each
in turn, spread the word to other users and generate other and develop friendships off-line.
enthusiasm about Xiaomi products.
Thanks to such enthusiasm, when Xiaomi was
about to unveil its mobile phone in September Customer involvement in the product
2011, there were already 300,000 MIUI users, development life cycle has not only
many of whom then became the first batch of
helped Xiaomi reduce R&D costs but
customers for the Xiaomi smartphone. Xiaomi
has continued to cultivate user participation
also enabled the company to cultivate a
through its online platform, which by April 2014 sense of participation and pride among
had more than 10 million registered users, gener- tech-savvy lead users.
ating more than 1 million visits and more than
250,000 posts every day.
Xiaomi turns to the Internet as a major channel This model of participation and communica-
to communicate with its users. When the youth tion that harnesses fans’ passion, energy, and time
version of the Xiaomi phone was launched, Xiaomi generally works well for nonprofit programs like
designed a marketing poster that mimicked a pop- those for religious groups and believers or for uni-
ular movie but starred seven company executives. versities and alumni. In recent decades, nonprofit
This poster was put on Xiaomi’s microblog page open-source movements and Wikipedia have also
and reposted 2.03 million times, and the number of drawn on similar methods to succeed. In contrast,
fans “liking” Xiaomi’s official microblog account the history of for-profit companies relying on fan
increased by 410,000. Xiaomi’s high-ranking exec- energy and participation for growth is much more
utives are also good at interacting with the media. limited. It will be interesting to see the extent to
They are open to sharing Xiaomi’s stories and their which Xiaomi will be able to continue to tap into
own stories, which results in publicity. its customers’ enthusiasm as the company grows
Interacting with users in fun and lighthearted and matures.
ways is another feature of Xiaomi’s marketing
Jielin Dong is a professor of innovation and entre-
strategy. In China, Xiaomi has compiled humorous preneurship and director of the Center for Enterprise
videos on different public websites to entertain Innovation and Development at Soochow University
people and raise awareness of its brand. Xiaomi has in Suzhou, China. Yanli Zhang is a research fellow
at the Center for Enterprise Innovation and Develop-
also devised a system to incentivize registered users ment at Soochow University and an associate
on its website to play games in which they accumu- professor of management at the Feliciano School
late scores, VIP medals of honor, and even virtual of Business at Montclair State University in
Montclair, New Jersey. Comment on this article at
Xiaomi money. Users with high scores and lots of http://sloanreview.mit.edu/x/57217, or contact the
medals are entitled to precedence in attending authors at smrfeedback@mit.edu.
events organized by the company and buying in- Reprint 57217.
demand Xiaomi products. They can also enjoy Copyright © Massachusetts Institute of Technology, 2016.
premium services. All rights reserved.
SLOANREVIEW.MIT.EDU WINTER 2016 MIT SLOAN MANAGEMENT REVIEW 95
SPECIAL COLLECTION • “FITTING SOCIAL MEDIA INTO YOUR STRATEGY”• MIT SLOAN MANAGEMENT REVIEW 15MARKET RESEARCH
Which Features Increase
Customer Retention?
Most companies aspire to design goods and services that
THE LEADING
encourage repeat business. Yet businesses often invest in QUESTION
expensive features without adequately understanding How should
how the features that attract new customers may differ companies
decide which
from those that will retain existing ones. features to
BY REBECCA W. HAMILTON, ROLAND T. RUST, AND CHEKITAN S. DEV include in
products or
services?
FINDINGS
COMPANIES MUST MAKE important decisions about which features to include in the Features that retain
customers may be
goods and services they offer to customers. Understanding the return on investment (ROI) for a different from those
feature is essential to increasing profitability. Adding features increases costs, but it may increase that attract new
customers.
revenues as well, either by attracting new customers or retaining existing customers. Notably, as we Having too many
describe in this article, the features that retain customers may be different from the features that features can de-
crease customer
initially attract customers. satisfaction.
Customer lifetime value is the net profit earned over the course of a company’s relationship with Different research
methods are suited
the customer.1 To maximize customer lifetime value, a company must not only convince customers to to measuring the ef-
buy its product or service once; it must also retain them. Hotel and airline companies, for example, fects of features on
customer attraction
invest heavily in loyalty programs designed to encourage their best customers to come back again and retention.
and again. About one-third of leisure
guests and about one-half of business
travelers say they are loyal to a hotel
brand. 2 Subscription-based services
such as Netflix and Amazon Prime
frequently offer free trials to attract cus-
tomers, hoping that they will recoup
their investment when customers sign
up and become paying subscribers.
Profits flow to video game app develop-
ers not when their apps are downloaded
for free, but when users decide to keep
playing and spend money to upgrade the
app or make in-app purchases. Yet in
many cases, the notion of generating
revenue is no more than a pipe dream:
According to one estimate, less than
40% of video game players return to a
free-to-play game after the first session;3
another analysis found that, on average,
WINTER 2017 MIT SLOAN MANAGEMENT REVIEW 79
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