Reinvigorating Value Creation in a Commoditized Market
It is no surprise that it’s becoming increasingly challenging for manufacturers to differentiate themselves in today’s highly competitive Consumer Packaged Goods (CPG) markets. Consumers often struggle to find real differences in the plethora of products available in our long tail economy and this can drive purchasing behavior towards the lowest price option. In this context, charging a premium for higher-end options can be difficult to sustain, sometimes leading to a commoditization effect within certain product categories. Mass customization is one possible strategy to address these challenges and reinvigorate stagnant markets.
The term “mass customization” was first popularized by Joseph Pine in the early 1990s, who defined it as “developing, producing, marketing, and delivering affordable goods and services with enough variety and customization that nearly everyone finds exactly what they want.” The concept gained a great deal of attention and was thought by some as a vanguard to replace mass production as the new paradigm for manufacturing. However, it never delivered on its promise and remained a strategy only used by a few companies.
Today, a resurrection of customization is taking place across a range of markets thanks to the evolution of technology and changes in consumer lifestyles. In the digital world it has become the expected norm, with some hardware companies building customization capability right into the core functionality of their products. Sonos, for instance, provides audio systems that customize themselves to adapt to each individual home’s acoustic environment. Even amusement parks like LEGOLAND are now allowing visitors to program their own ride.
For CPG companies, the logistical challenge should not be underestimated. Enormous production runs and vast distribution networks generate significant operational and organizational complexity. But here again, the rapid evolution of technology is unlocking opportunities: by moving the customization moment closer to the point of purchase, manufacturers can simplify the supply chain significantly and engage with the consumer where it matters the most.
How can mass customization create value for CPG companies?
At the core of mass customization is the realization that a personalized product is more valuable to the user, both in terms of improved satisfaction of user-specific needs as well as the feeling of craftsmanship as if the product is “tailor made for you.” For example, according to a 2011 study by the NPD Group, customers are happy to pay a 25 percent premium for goods built specifically to their needs. This premium varies depending on the product category—for luxury brands such as Burberry or Louis Vuitton, it is at least as high as 50 percent.
There is evidence that custom products generate higher satisfaction and command a higher price, and the benefits don’t stop there. Higher satisfaction leads to fewer product returns, increased repeat sales, and effective word of mouth advertising—something that cannot be underestimated in the age of social media. Perhaps more importantly, mass customization creates a new type of relationship between manufacturer and consumer. The mass customizer now has the opportunity to engage in an on-going conversation with its consumers and their preferences.
The Coca-Cola Freestyle is a great example of mass customization at its best. With this novel beverage dispensing system, consumers can choose from an unprecedented number of brands or customize their own drink via a touchscreen. Restaurant owners can also take advantage of customization by creating beverages to match a specific menu item. This technology has not only revolutionized Coca-Cola’s presence in restaurants, it has also replaced bulky syrup boxes with small cartridges of micro-ingredients, significantly simplifying logistics and reducing costs. The machine also reorders cartridges automatically and provides advice on maintenance.
Furthermore, connected digital technology enables Coca-Cola to analyze consumption patterns on a new level. The marketers in Atlanta can gain insight into what beverages are preferred at what time of the day and in what geographic location. Correlating this information with other data, Coca-Cola can then identify unmet needs and run targeted marketing campaigns.
What are the keys to success?
Mass customization is far from a panacea. According to a study by Frank Piller and Dominik Walcher, 20 percent of mass customization startups fail within 15 months. The authors recommended companies focus on developing three distinct capabilities in order to maximize their chances of success: solution space development, process design and choice navigation.
Solution space development
It is crucial for companies to realize that implementing customization for the reason of customization provides limited customer value and does not deliver meaningful differentiation in the long run. It may deliver a lot of buzz and news value in the short term, but once the novelty has worn off, the return business does not occur. Determining where customization provides value is often the least understood practice in mass customization, and consequently often a reason of failure.
Building design research and early evaluation of consumer perception into the solution space development is critical. Testing should commence at the early concept stage and can employ a range of user research and experience design tools. These tools can be aided by story boards, non-functional mockups, and user interface prototypes to test value propositions and uncover unmet needs among competing concepts. Several test, learn, and retest cycles can be employed to gain key insights in order to refine the mass customization concept.
Robust process design
In order to ensure a viable business case, the customizer needs a robust process design to deliver customized solutions with near mass-production efficiency, quality and reliability. One of the key elements to reduce supply chain complexity is the notion of “late customization,” which is defined as “effectively postponing the task of differentiating a product for a specific customer until the latest possible point in the supply network.”
In the retail environment, this often means implementing complex functions where there is little or no technical support on hand. In order to achieve the level of usability, reliability, and durability required for customization at point of sale, CPG companies need to implement rigorous risk mitigation throughout the product development process, focusing on:
Identifying possible failure modes and designing them out where possible. This includes anticipating misuse, component failures, and wear and tear
Identifying high-risk functions early, particularly where significant technology development is required, and planning for iterative prototyping
Challenging, testing, and refining the user experience while ensuring delivery of quality and supportability of the mass customization “system” throughout the development
The customizing company must be able to support consumers in easily identifying the preferred solution. As Frank Piller puts it, “When a customer is exposed to too many choices, the cognitive cost of evaluation can easily outweigh the increased utility of having more choices, creating the ‘paradox of choice’: too many choices reduce customer value, instead of increasing it.”
The most obvious strategy to overcome the “paradox of choice” is to turn the act of choosing into a rewarding and engaging experience. There are numerous examples of highly engaging web-based interfaces that take you through a tailoring process that is rewarding and adds value to the product being customized. Shoes of Prey is a great example of enabling anyone to design and order complex shoes with a few keystrokes.
But some companies have taken one step further in the path of choice navigation, assisting the consumers more actively in the customizing process. For instance, at The Left Shoe Company, the customer steps on to a 3D scanner that analyses and measures both feet from every possible angle. A highly accurate 360-degree digital model of each foot is created and then used to manufacture a totally unique shoe. The customer doesn’t have to worry about making choices, as it’s largely taken care of by the system. This sort of active assistance through the customization process is a great example of where CPG mass customization is headed.
Global leaders like Nike and Coca-Cola have demonstrated the power of mass customization to create value and build competitive advantage in their markets. It can be argued that advances in technology will fuel the customization trend even more and take it to unprecedented levels. Customizing companies will increasingly use technology to radically improve both choice navigation and process design.
The next frontier in choice navigation is likely to involve intelligent and predictive platforms that are becoming more natural and immersive in their mode of interaction. Augmented reality (AR) is opening up opportunities to create powerful instantaneous discovery around products. Similarly, advances in point of care diagnostics will further assist consumers in their selection process, rendering choice navigation completely seamless and integrated into our lifestyles as consumers are increasingly managing their health.
L’Oréal has already launched the revolutionary beauty tool Makeup Genius, which transforms smartphones into interactive mirrors. It’s an AR product catalog that lets people try on different products in real time, reducing the need for physical interaction with beauty products.
The manufacturing of the customized product will increasingly leave its factory environment and move into our homes, potentially using 3D printing and medical grade dosing and mixing technologies. Nestlé’s Institute of Health Sciences’ (NIHS) Iron Man program is a great example that illustrates both advanced choice navigation and process design. According to the NIHS’s Director, Ed Baetge, “Iron Man is an analysis of what’s missing in our diets, and a product tailored to you to help make up that difference…Out comes your food at the press of a button. If we do this right, it can be the next microwave in your kitchen.”
As technology allows consumers to gain deep insights into what they really need and desire and enables more flexible manufacturing solutions mass customization might very well become the new paradigm for manufacturing industries. Companies that enter this new game early and hone their customizing capabilities will build critical know-how and expertise in an area that is likely to become a key competitive component in the future of business.
Pine II, J. (1992). Mass Customization: The New Frontier in Business Competition.
Anthony Flynn (2012) Custom Nation: Why Customization Is the Future of Business and How to Profit from it.
Dominque Walcher and Frank Piller (2012). The customization 500 – An international Benchmark Study on Mass Customization and Personalization in Consumer E-Commerce.
Chase, Richard B.; Jacobs, F. Robert; Aquilano, Nicholas J. (2006). Operations Management for Competitive Advantage (11th ed.).
Magnus Ahlstrom is a program manager with Invetech, and unique in that he is based in Sweden. With qualifications in marketing and industrial design, Magnus is highly valued by our clients particularly in healthcare and consumer markets.