Net Worth: Shaping Markets When Customers Make the Rulesby John Hagel, Mark Singer
Net Worth explains how businesses can benefit by forming new partnerships with customers in matters of information capture and privacy. Consumers are losing patience with companies that use personal data about buying habits, income levels, and credit card usage for corporate gain. What consumers need is a new kind of businessan information/i>
- Editorial Reviews
- Product Details
- Related Subjects
- Read an Excerpt
- What People Are Saying
- Meet the author
Net Worth explains how businesses can benefit by forming new partnerships with customers in matters of information capture and privacy. Consumers are losing patience with companies that use personal data about buying habits, income levels, and credit card usage for corporate gain. What consumers need is a new kind of businessan information intermediary or infomediaryto protect customers' privacy while maximizing their information assets. Companies playing the infomediary role will become agents of customer information, marketing such data to businesses on consumers' behalf and protecting consumer privacy. John Hagel, co-author of the bestselling Net Gain, teams with Marc Singer to lay out the underlying economic and competitive dynamics that will foster the emerging business of the infomediary. Net Worth identifies the convergence of commerce, technology, and consumer frustration as the incubator for the infomediary business, as consumers seek to release their personal information only when they can receive value in exchange for their data.
Forget disintermediation and one-to-one marketing, these information intermediaries will get between buyers and sellers and act as trusted agents that selectively exchange data between the two sectors. In this world, consumers will somehow trust their personal characteristics and purchasing habits to the infomediary to simultaneously protect their privacy and save time and money on shopping. Businesses will give up direct contact with these customers so they can instead buy prequalified leads and gain more data about customers from the infomediary. Net Worth estimates that an infomediary that recruits 1 million members by the end of its second year could realize revenues approaching $100 million.
But whether customers and businesses will buy into this utopian vision of a world free from spam, telemarketer calls during dinner and haggle-free auto buying remains a long shot.
- Harvard Business Review Press
- Publication date:
- Product dimensions:
- 6.51(w) x 9.66(h) x 1.16(d)
Read an Excerpt
The right to be left alone.
Film actress Greta Garbo craved it. Justice Louis Brandeis defended it. And the Fourth and Fifth Amendments to the U.S. Constitution uphold it.
In the landmark case Olmstead v. United States in 1928, Brandeis wrote: "The right to be left alone is the most comprehensive of rights, and the right most valued by a free people."
But protecting that right is becoming more difficult. Each day, marketers expose Americans to some 12 billion display ads, 3 million radio ads, and more than 300,000 television commercials. The unsolicited electronic junk mail known as "spam" now constitutes some 10 percent of all worldwide e-mail. The average U.S. consumer receives roughly 1 million marketing messages a year across all media, or about 3,000 messages per day. Worse yet, companies are using private information ferreted out of daily commercial transactions, financial arrangements, and survey responses to inundate consumers with still more commercial messages (and sometimes to deny them credit or insurance).
The very words marketers use to describe their methods of finding and connecting with customers--military metaphors such as target, campaign, deploy, blitz, and capture--betray an increasingly "us versus them" mentality about how companies treat consumers. Telemarketers call consumers at home at all hours of the day and evening. Direct marketers stuff their mailboxes with unsolicited catalogs and junk mail. Relationship marketers demand more and more of their personal information. Who can blame consumers for feeling besieged?
The rise of the Internet, with its ability to help companies more easily obtain information about customers, brings privacy issues center stage. Consumers and the groups that protect them, such as the Electronic Frontier Foundation, worry about privacy. They worry that businesses will use the Internet to capture customer information (without consumers' knowing it) when consumers visit corporate Web sites and, by merging this information with a wide range of other publicly available data (such as credit histories, phone bills, and medical records), will be in a better position to leverage vast databases of customer information.
Lawmakers and advocacy groups in many different countries are marshaling their forces against the perceived threat. In the United States, for example, legislators have sponsored a comprehensive consumer health care bill of rights at both national and state levels. Consumers are acting on their own behalf as well. Some have requested that marketers remove their names from telemarketing and direct mail lists. Others take part in "Buy Nothing Day"--a 24-hour moratorium on consumer spending sponsored during the Christmas shopping season by Adbusters, a group that vows to hold the marketing strategies of consumer products companies "up to public scrutiny and to set new agendas in their industries." Others provide false information in on-line registrations, surveys, and forms. Still others participate in "TV Turnoff Week." And some go so far as to respond to ads calling for focus group participants in the classified section of local newspapers and then deliberately give false information to questioners.
These actions may well represent a broader consumer backlash.
* A 1996 DIRECT survey found that 83 percent of those surveyed said there should be a law requiring an opt-in procedure for names to be included on direct mail lists.
* A 1998 survey of more than 10,000 World Wide Web users by Graphic, Visualization & Usability (GVU) found that 72 percent of Internet users believed there should be new laws to protect privacy on the Internet and that 82 percent of users objected to the sale of personal information.
* A 1998 Business Week poll found that 53 percent of respondents said government should pass laws now for how personal information can be captured and used on-line, a figure three times higher than the number of consumers who support the idea that the government should let trade groups develop voluntary privacy standards.
These survey findings are borne out by recent warnings from trade groups and organizations that oversee corporations. In 1997 the U.S. Federal Trade Commission warned businesses to adopt strong privacy guidelines to avoid government legislation. In 1998 the U.S. comptroller of the currency (who oversees nationally chartered banks) cautioned banks to take steps to protect consumers' privacy or risk new government regulations. That same year, the National Retail Federation suggested voluntary guidelines for U.S. retailers that would let customers know beforehand what types of personal information were being collected at the cash register--and how retailers planned to use that information.
Few marketers seem to have recognized the importance of the issue to consumers.
* In late 1998, Geocities, a popular Internet site that allows consumers to put up free Web sites, agreed to settle FTC charges that it had misled its 2 million members by secretly selling their personal information to marketers. The charges resulted in a 15 percent drop in Geocities' stock on the Nasdaq.
* Pacific Bell requested in 1998 that regulators allow it to call unlisted numbers with unsolicited sales pitches. Regulators turned the company down after consumer groups and California legislators blasted the proposal.
* America Online decided to sell its members' phone numbers to a telemarketing company in 1997, reversing itself later after members protested.
* American Express announced plans in 1998 to sell extensive information on its cardholders to merchants, despite considerable criticism from privacy groups.
* Blizzard Entertainment (maker of the popular Starcraft on-line game) admitted in 1998 that it copied personal information without consent from consumers' computers via the Internet.
* Giant Foods and CVS (a supermarket and a drugstore chain, respectively) decided in 1998 to stop sharing medical information with a marketer paid to send customers prescription reminders and promotional literature for new drugs--but only after critics called the practice unethical and a violation of privacy.
* In 1998 GTE Corporation inadvertently published the unlisted phone numbers and addresses of up to 50,000 California customers, some of whom, such as police officers and crime victims, could have had their personal safety compromised. The blunder led to 25,000 calls to the company, 400 e-mails, and 1,500 requests for new phone numbers.
Beneath the current antagonism, marketers and consumers share a set of very real common needs--consumers need the goods and services vendors sell, and vendors need consumers to buy these goods and services. But the fact that it is economical for companies to send out junk mail and catalogs with the expectation of a 2 percent response rate means that 98 percent of what consumers receive is irrelevant to their needs and interests. Inundated with so many irrelevant messages, consumers feel beseiged by marketers. Marketers are beginning to wear out their welcome with the people they need the most.
The high cost of shopping
Ironically enough, consumers have never been more alone--despite the 3,000 marketing messages they receive each day. With ever more products launched, and the complexity of many products on the rise, the time and money that consumers spend searching out the best possible product at the best possible price may be higher than at any time in the past, particularly for those high-ticket, complex items they purchase infrequently. More troubling still, consumers continue to be vulnerable to the risks of moral hazard and asymmetric information--the perennial standbys of consumer rip-off.
Consider the home computer. Computers are impressively complicated machines to purchase, install, and operate. Anyone who has tried to buy one (and some 60 million American households have at least one) knows the frustration of talking to salesclerks who don't have a clue about which features are really important. Worse yet are salesclerks who overwhelm the customer with technobabble in a sincere effort to be helpful. Do you want your computer with a 1GB Jaz drive with 12ms access time and 5.5Mbps data transfer? How about an STB nVidia 4 MB 3D AGP video card? or a 1000LS monitor?
And the fun doesn't stop when you've made the purchase. Most consumers find setting up their new computer a challenge, to say the least. The New York Times reports that home computer vendors receive some 28 million technical support calls every year. Microsoft alone receives approximately 15,000 cries for help a day. After setup comes learning how to get on the Internet--another formidable task.
Consumers may expect such challenges when it comes to buying computers. But what about cars, televisions, washing machines, even the lowly coffeemaker? For many of the products consumers buy, particularly those they don't buy very often, the time and money they spend searching out the best product at the best possible price are going up.
Some readers may question this assertion. After all, the telephone (and the yellow pages) let your fingers do the walking, and the advent of the Internet has made searching out products even easier. Research shows that, for some products, the telephone and the Internet have greatly reduced the search time needed to find them.
But consumers experience this ease of search primarily for products they purchase relatively frequently and for which they don't have to conduct much research. It's a snap to dial up Amazon.com and order a best-seller, or to go to Travelocity and find the best airfare between Dallas and Rome. But what about more complex purchases, like an air conditioner or a health club membership?
If you want to do it right, buying an air conditioner for a particular room requires a complex calculation. The variables include
* The length of the walls in the room you want to cool and whether they're facing north or are shaded.
* The materials the walls are made of (masonry up to 8 inches thick? uninsulated?).
* The ceiling area of the room, in square feet, and the insulation above the ceiling.
* The floor space.
* The number of doors and arches.
* The type and orientation of the windows (and whether or not they have shades).
* The number of people who normally use the room (more body heat means you need more air-conditioning power).
* The total wattage of appliances being used, and how many hours you'd typically use the air conditioner in the given area.
Rather than figure all this out, of course, most consumers simply head for the appliance store and throw themselves on the mercy of the salesclerk.
Or consider a health club. As Consumer Reports points out, "Joining a health club can be as tricky as buying a used car. You have to find a club that matches your needs, navigate the nuances of a contract that may lock you in for a year or more, pay a substantial fee--for a fancy club, perhaps $500 for initiation and $75 a month--then exercise enough will power to exercise your body more than once in a blue moon."
The problem with either of these purchases is the risk involved. Will the salesclerk really know which air conditioner will best match the customer's needs, or is he more likely to steer they buyer toward the product at hand or the highest-margin item? Will the salesperson at the health club fill customers in about their cancellation rights? Will the club really buy the new equipment and install the whirlpool next month as it claims? The Federal Trade Commission frequently pursues rogue health clubs for high-pressure sales tactics, bait and switch, and unfair billing.
These kinds of risks to consumers arise from what economists call "asymmetric information," which occurs when the seller knows more about the quality of a product than the buyer does. The textbook case is the used car. The used-car dealer may know that the sedan he's selling is a lemon with a bad clutch and worn brakes, but the buyer, kicking the tires and looking at the new paint job, won't know about these defects. Even if the buyer hires a mechanic to look at the car, chances are the seller is still going to know more about it. The buyer therefore runs the risk of paying more than the car is worth.
The problem of asymmetric information has increased dramatically with the number of new on-line vendors. Not only are consumers unable to physically inspect a product in cyberspace, but they often don't know whether the company selling it is big or small, new or established, legitimate or illegitimate.
Consumers can fall victim to "moral hazard" as well. The classic case of moral hazard comes from the pre-managed care era of health care, when a consumer could purchase complete medical insurance coverage and then proceed to visit the doctor more often than he or she would have with limited coverage. With the advent of managed care, the shoe is on the other foot--the consumer, not the insurer, is at risk. Now that physicians are under pressure from the cost-conscious HMOs that employ them to reduce treatment costs, consumers no longer blindly trust their doctors to put their interests ahead of the HMO's, their employer's. Physicians may give their primary loyalty to the HMO rather than to the patient. (Of course, vendors can also fall prey to moral hazard, as when consumers falsify information on surveys.)
Needle in a haystack
Product proliferation also plays a part in raising the interaction cost of purchasing products and services: there are simply more products out there than in the past. Companies used to introduce their products once every five years or so. Intensified competition and improved innovation now mean that companies modify or replace products on six-month cycles. Technological innovations have reduced minimum scale and made it easier for smaller companies to enter and compete successfully in many markets--bringing with them still more products. Information technology, meanwhile, helps companies expand their reach from local markets to global markets, increasing the choices available to the customer in any local market. Widespread deregulation (in the form of trade liberalization and the removal of restrictions on entry into specific industries) also encourages entry by new vendors.
The advent of the Internet has released an explosion of choices for the consumer by removing the constraint that used to hold back the proliferation of products--limited retail shelf space. With the Internet, shelf space constraints disappear. By logging on to the Internet, consumers can access all products offered for sale within a particular category.
As the range of potential choices expands, the time and effort required to sort through them also expands. Because different vendors offer these different products, difficulty comparing and evaluating products increases. Vendors, in an understandable effort to differentiate their offerings, seek to design and represent their products in a slightly different way, making straightforward comparisons virtually impossible. In the case of consumer electronics, for example, vendors will often take the same model of VCR or "boom box" and change the model number, color, and perhaps a marginal feature or two to allow major retailers to differentiate their offerings from those of other retailers.
These problems are difficult enough when the customer is actively searching for a product to meet a specific need. The problem becomes even more severe when customers are browsing for products--in other words, when they don't know in advance what product they want. The may not even be planning a purchase. As product offerings proliferate, the effort required to browse through thousands, if not millions, of product variants within specific categories becomes like searching for the proverbial needle in a haystack.
A widening gulf
Behind the continuing invasion of consumer privacy and the constant expansion of product choices lurks an unrecognized truth about consumers and marketers: their wants and needs are misaligned. Marketers gather customer information and create loyalty programs to build deeper and more lasting "relationships" with customers, but the customer's demand for selection and comparison is sharply at odds with a deep or exclusive relationship with any one vendor. Marketers want all the information they can possibly get hold of about customers, but customers demand that their privacy be respected and protected.
The apparent conflict has its roots in the marketing approaches that have come into fashion over the last 10 to 20 years. Approaches like database marketing, relationship marketing, permission marketing, and loyalty programs aim largely to help marketers overcome a fundamental lack of information about the customers they don't know by giving them more information about the customers they do know.
The limitations of relationship ...
"Relationship marketing"--also known as "one-to-one marketing"--first came into fashion in part because companies were (and still are) limited in the type of information they can obtain about people who aren't already their customers. United Airlines, for example, identifies business travelers who fly extensively on United and often upgrades service to those travelers to increase loyalty to United. But it has much less ability to identify an American Airlines frequent flyer who happened to book a flight on United. From United's perspective, this passenger is a relatively uninteresting one because she doesn't appear to travel much; therefore she doesn't receive special attention or service. If United had access to integrated travel profiles of all its passengers (even people who have never flown United before), it could be much more effective in targeting and serving highly profitable business travelers.
Because companies aren't as well positioned to learn about people who are not yet their customers, relationship marketing focuses companies largely on collecting additional information about the customers they do have. The idea is to set in motion a virtuous cycle in which companies deliver additional value to customers. Customers are in turn motivated to provide additional information to companies, which those companies can then use to deliver yet more value.
This is why relationship marketers put so much emphasis on "share of wallet" within a product or service category as a key measure of success. To capture as much information as possible about the customer, the product vendor must capture the full range of the customer's business within a particular category. For one-to-one marketing to work to its full potential, there isn't room for more than one vendor. Any notion of customers' spreading their business among multiple vendors undermines the ability to build rich profiles of customers--and to capture a high share of their transactions.
Companies using relationship marketing are thereby at odds with the customer's need for selection and comparison. Moreover, the relationship marketer's need to capture as much information as possible often leads it to intrude on customers' lives to an increasingly intolerable extent.
... and permission marketing
Another approach to marketing is known as "permission marketing." Permission marketing explicitly acknowledges the importance of obtaining permission from customers before blitzing them with advertising messages and criticizes the "interruption" marketing programs in which advertisements are inserted in media or delivered in unsolicited ways, such as a phone call at dinner. Advocates of permission marketing instead propose contests and sweepstakes in which customers will participate in exchange for agreeing to receive certain marketing messages.
Permission marketing begins to address the challenge of finding and reaching customers in a less intrusive way than traditional marketing approaches. It introduces the notion that vendors should be prepared to pay customers either in kind or in cash in exchange for their attention. But permission marketing fails to address the challenges marketers face in accessing information about customers who purchase from competing vendors. Even in the case of customers who do business with a particular vendor, that vendor never really knows whether its customers are giving it 10 percent of their business or 100 percent. Unable to get information about customers whom the company doesn't already have, the company must revert back to its old techniques of interruption marketing to get more business from existing customers.
An economic force works against permission marketing per se as follows. The high value of an acquired customer enables marketers to profit from making so many calls and sending so many pieces of direct mail--even when consumers reply only 2 percent of the time. Moreover, marketers don't bear the cost of the interruption--the consumer, who pays for it with his or her time, bears it instead.
Thus we have a widening gulf between marketers and consumers. Not long ago, consumers regularly responded to marketing surveys. Today most will complete surveys only if they receive rewards in cash or in kind. Customers once provided companies with referrals for new business; today they rarely give out such information for free. Ten years ago, many consumers responded politely to telemarketers who called them at home during the dinner hour to conduct surveys. Today people resent the imposition on their time. Soon consumers will demand that telemarketers compensate them, just as people now routinely receive compensation for participating in focus groups.
The Internet only makes the dilemma more acute. As the Internet lowers barriers to market entry and the number of product vendors expands, marketers will confront growing competition for customers' attention. Most will increase their use of advertising, direct mail, telemarketing, and spam. Numbed consumers will pay less and less attention, prompting all the more advertising in response. These same dynamics will play themselves out as companies use the Internet to capture ever more detailed customer information, and consumers will respond with demands for stricter government controls on information capture and use.
Power shifts to the consumer
The current conflict between marketers and consumers also results from the economics of information capture. Consumers have become all too aware that companies' ability to collect information far outstrips their ability--or inclination--to deliver meaningful value in return. As we've seen, the primary use of customer information by companies today instead seems to be to generate growing volumes of junk mail and unsolicited telemarketing calls. It seems that one of the easiest ways for companies to generate value from the customer information they've captured is to sell it to third-party list companies. The list companies in turn resell the information to a variety of companies that use it to target their direct mail and telemarketing offers. Consumers increasingly recognize that they are selling their "privacy" cheaply to companies that are using it to forward their own interests.
Seen in this light, the privacy backlash for many consumers may have less to do with the desire to keep information about themselves confidential and more to do with the pragmatic assessment that the returns for the information they divulge are, simply put, unsatisfactory. Consumers are rational beings, after all. Most have shown that they are willing to release personal information if they can profit by doing so. In a doctor's office, consumers share intimate details about their health in exchange for appropriate medical care. They share intimate details about their finances with financial advisers because the quality of advice they receive depends on a detailed understanding of this information. They insist that the airline record their frequent-flier numbers so that they may receive miles good for upgrades, free flights, and a growing array of other products and services. In all of these exchanges, the key is for consumers to receive sufficient value in exchange for divulging their information.
Several new technologies will soon enable consumers to challenge marketers for control of their information. (These, and the other technologies discussed in this chapter, are more fully defined in the Appendix, "The Technology Tool Kit.") In the on-line world, these technologies include
* Anonymization software, which allows on-line users to shield their identity as they surf the Web.
* Cookie suppressors, which defeat a Web site's ability to plant information in an on-line user's computer that can be used to identify the user and track his or her behavior.
* E-mail filters, which allow on-line users to screen out unwanted spam.
* Anonymous payment mechanisms, which allow on-line users to buy something without revealing who they are.
* Reverse cookies, which will allow consumers to keep track of and store a record of their own on-line behavior.
In the physical world, these technologies include
* Smart cards, which act like credit or ATM cards but which "remember" their transactions.
* Digital cash, which is like physical-world cash, except that it's used on-line.
* Set-top boxes for televisions, which will allow the consumer to record his or her television-viewing behavior.
These technologies, alone or in combination, will for the first time enable consumers to seize control of information about themselves and choose whether to keep it private or share it with product and service vendors or a third party.
Taken together, or in combination, these technologies allow consumers to obtain much more comprehensive and accurate profiles of their own commercial activities than any individual company--or plausible combination of companies--could hope to collect. Through these technologies, users will be able to choose whether to release or withhold information about themselves. Their decisions will hinge, in large part, on what companies offer them in return for their data.
As these technologies simplify information capture for consumers, they complicate it for companies. Anonymizer sites can cloak the identity of consumers as they surf the Web, shielding the information from vendors. Consumers can use smart cards and reverse cookies to capture and store the names of vendors and transaction amounts (although the ability to obtain details about the specific items a consumer buys will require a common set of standards and protocols). The smart card or reverse cookie user can then routinely download this information into a PC to produce an integrated profile of his or her purchases. More ambitious consumers could merge this information with data collected on viewing meters attached to their television sets to obtain a profile that combines viewing habits with purchasing patterns. Marketers would be willing to pay handsomely for such information.
Thus, in one elegant stroke, these technologies will offer a solution for people worried about privacy. If they don't wish to reveal information, the technology makes denial possible. But if they choose to make information available in return for something of tangible value--as the evidence suggests most consumers will--they will have that opportunity. And so should the seller beware--and be ready with an offer to the consumer.
The rise of the infomediary
Consumers won't have the time, the patience, or the ability to work out the best deals with information buyers on their own (nor will vendors have time to haggle, customer by customer). In order for consumers to strike the best bargain with vendors, they'll need a trusted third party--a kind of personal agent, information intermediary, or infomediary--to aggregate their information with that of other consumers and to use the combined market power to negotiate with vendors on their behalf.
In this book, we argue that companies playing the infomediary role will become the custodians, agents, and brokers of customer information, marketing it to businesses (and providing them with access to it) on consumers' behalf, while at the same time protecting their privacy. These new entities will emerge from combinations of companies that provide unique brand franchises, strong relationships with their customers, and radically new strategies. They will become the catalyst for people to begin demanding value in exchange for data about themselves. By offering a variety of agent and targeted marketing services, they will help consumers reduce the "interaction" cost of searching for goods at favorable prices in an environment of proliferating, increasingly complex products.
Because their value to the consumer will come, in part, through lowering the interaction costs consumers face, infomediaries will emerge first in markets where product lines are rapidly changing and complex, and where pricing is opaque or complicated in ways consumers have a hard time understanding. Products in these markets often require substantial research to evaluate and have prices that are hard to compare. Because customers will interact with an infomediary primarily over the Internet, and because the infomediary's services will be essentially information based, infomediaries will also find fertile ground in markets where products and services have high information content and can be delivered in digital form.
The infomediary's role will, in fact, be a very traditional one. As consumers take ownership of their own behavioral and transactional data, they'll create a new form of information supply. By connecting information supply with information demand, and by helping both parties determine the value of that information, infomediaries will build a new kind of information supply chain. Thus will they bridge the widening chasm that separates marketers and consumers.
This book explains how the senior managers of today's biggest corporations--as well as farsighted entrepreneurs--can benefit by taking the customer's side in matters of privacy and information capture. Those who recognize the opportunity to truly champion the customer (rather than simply paying lip service to the idea) will be able to build infomediaries that generate considerable revenues and market value. Companies that choose not to form infomediaries must pay close attention as infomediation invades the markets where they compete. Infomediaries will be the catalyst for sweeping forces that the Internet (and information technology in general) has already set in motion. Companies will ignore these forces only at their own risk.
What People are saying about this
Meet the Author
John Hagel III is a principal in McKinsey & Company, Inc.'s Silicon Valley office and a leader of the firm's Interactive Multimedia Practice. He is the coauthor of the bestselling book Net Gain: Expanding Markets through Virtual Communities.
and post it to your social network
Most Helpful Customer Reviews
See all customer reviews >