Innovation efforts across many industries, including transportation and logistics, have a tendency to focus on products and services.
It’s an effort that’s paid off in the past, as the persistent drive to add features, incorporate new technologies and create niches has led to breakthrough innovations and created billions of dollars in economic value. Increasingly though, companies are finding that growth from product innovation is becoming incremental and fleeting. Global competition and technology diffusion mean that competitors can quickly match most improvements. And the radical transparency of digital and social media prompts customers to switch allegiance with each new alluring offer.
For many of today’s most innovative and up-and-coming brands, however, there is a new star (or an old star reborn) driving differentiation and growth: Customer experience. Companies are creating value and gaining brand loyalty not by focusing on specific product features or design, but by reimagining how customers use their products and services in the broadest possible terms:
- Car service Uber didn’t change the vehicle or retrain the drivers; it fundamentally changed how customers order, meet and pay for the service.
- Airbnb didn’t redesign the travel portal or the hotel; it completely rethought how people can find the room they need.
- Tesla doesn’t just sell an electric car; it delivers a vitally different customer experience through the use of e-commerce and remote technologies.
Each of these companies has mastered a discipline we call “experience innovation”: taking a more comprehensive view of the lives of their customers and how they interact with the company’s products/services and delivering new, unexpected “signature” moments. These experience innovators focus less on selling what they make and more on solving customer problems in a way unique to their brands — with a rich array of experiences that surround and connect to the core offer.
Experience innovation is not new, of course, as the long-term success of Virgin airport clubs, Starbucks cafes and Disney theme parks can attest. These innovators have shown that experience isn’t just about the planes, the coffee or even the rides — it’s about how we feel when we use the product or service. Many companies recognize this: In a recent Forrester study, more than 80 percent of senior business leaders say that their companies are focused on improving the customer experience. And yet, 85 percent of firms have no systematic approach to determine what a differentiated customer experience looks like, let alone create one.
The reality is that innovating the customer experience is becoming a competitive necessity. In today’s digital world, with more brands and touchpoints than ever before, customers can quickly lose attention and affection. On the other hand, used creatively, mobile and social technologies can keep a brand in front of customers at any place and any time. Innovating the experience thus can be a source of differentiation, enhance loyalty and strengthen brand presence. Exhibit 1 below provides a snapshot of the customer experience innovation performance to date for transportation versus a number of other key industries.
The catch is that, while it may offer greater opportunity than the same old product song and dance, experience innovation also is more challenging, for a variety of reasons. Within an organization, a product or service is typically managed by one owner, while an experience may need to involve dozens of masters. After a strategy is forged, changing an experience can require mobilizing and energizing thousands of employees. Finally, experience innovation requires thinking differently about the business and reimagining things that may be taken for granted. Experience innovation thus requires a new mind-set and a new process, with several guiding principles:
When companies focus on customer experience, they often fall into one of two traps: targeting specific touchpoints (such as customer call centers) instead of holistically addressing the end-to-end customer experience, or thinking only in terms of operations and process efficiency. But experience innovation is as much about how to delight as how to deliver — how to identify the true emotional drivers of connection and loyalty. People remember the first time they are picked up by Virgin Airlines or rent a Zipcar for an hour. They remember because the experience was different and enjoyable, and it made the product or service more appealing. These experiences are thus “emotional markers” for these brands.
Expand into the ecosystem
Finding innovation opportunities often requires looking beyond a company’s narrow product or service category. Consider Apple, which has focused on building a lucrative array of services to surround its products. The iTunes ecosystem envisioned the entire music experience: innovating how music content was purchased, organized and managed. And taking a product company into the retail space allowed customers to engage with the product and its people — to feel the energy of the brand — while Apple captured retail margin. Thinking about customer needs in the spaces surrounding the core product or service offering can allow a company to expand its base and opportunities for growth.
Get ahead of the customer
Experience innovators recognize that customers can’t tell them about the things they need but haven’t yet imagined, or how they might do things differently in the future. When Delta brought the lounge directly to the gate, it created a new experience among frequent travelers who had never thought of the gate as a cafe and social destination. Gate lounges have enabled Delta to deliver an experience in line with its focus on “21st-century graciousness” — in a way customers might never have articulated in a focus group — while providing an opportunity for a new revenue stream.
Connect the dots
Finally, great experience innovation doesn’t involve coming up with a single “breakthrough” idea, but rather delivering a connected journey under one brand. Hyatt is innovating the all-inclusive resort category with the new Hyatt Zilara and Hyatt Ziva brands, which offer a tech-enabled resort experience: The website allows a potential customer to plan differently, a chip-enabled wristband serves as the key to a guest’s room, and guests can order a drink or lunch by the pool using a smartphone or tablet. One distinct idea, even a big one, is usually not enough. Product innovation might rely on one-off improvement; experience innovation ties together multiple moments and experiences.
Experience innovators see an 8 percent difference in stock price appreciation per year.
Creating the road map
The process of designing a truly innovative experience cannot rest on either the “process excellence” of classic customer experience improvement or the “creative brilliance” of the marketing team alone. Hard work, collaboration and new tools and processes are required.
Successful customer experience innovation starts with a detailed exploration of the customer journey — and how it could be different. What makes customers frustrated and annoyed? What makes them feel respected and valued? Rather than asking customers what they need, companies do better to observe how they behave and react at every step in the product experience, as a starting point for imagining new opportunities.
The next step involves finding those points that make an emotional connection or change the game. Looking at a map of customers’ most frequent touchpoints, what changes would they notice and remember? Are there big moves available: Is it possible to take entire steps out of the process, change the sequence, add new value in unexpected places? What about little moves — which can be surprisingly powerful emotional drivers: For example, Disney unexpectedly opens the park gates five minutes in advance, feeding off the “I’m about to be at Disney World” thrill. Focusing on defining signature experiences can deliver not just functional enhancements but emotional connections.
The third step on the road map involves creating a bold and forward-looking vision for the brand experience that will inspire internal teams and set a broad direction for innovation. A clear and proprietary set of guiding principles is important to ensure every moment tells the company’s story and connects to its brand in a unique way. Think in terms of a portfolio approach for execution: balancing simple changes that build momentum with longer-term investments that require more work but deliver more value.
Finally, when broad-based, interdisciplinary teams take these steps together, surprisingly powerful results can ensue. Drawing on expertise across functions is essential to push thinking on what is possible and to forge connections across operational silos. In addition, thoughtful organizational engagement is essential to execution, particularly when it comes to inspiring and training thousands of employees. The early involvement of leaders and frontline champions begins a process that should expand to inspire and transform the company.
What’s the payoff?
Experience innovation may be more complex than product innovation, but the rewards can be significantly greater. Lippincott’s study of more than 500 consumer-facing brands found that the stock price of experience innovation leaders appreciated by an average of 8 percent per year more than that of laggards over a five-year period, significantly outperforming the Standard & Poor 500. Focusing on the experience can create returns regardless of an organization’s degree of ambition:
- Innovating the experience finds untapped sources of differentiation to drive loyalty, preference and margin: Behavioral science research shows that buying an experience, such as a vacation or a concert, is more rewarding than buying a product alone. And great experience innovations create meaningful switching barriers — witness Nespresso’s capsule subscription model or Uber’s automatic payment capability.
- It’s often easier to drive loyalty from an experience than a product: For one of Lippincott’s technology clients, we found that 50 percent of customer renewals were driven by the software’s quality, ease of use and functionality. But the other 50 percent were driven by the sales and needs identification process, contracting, education programs and the ongoing service relationship. We determined that these experience elements could be improved almost twofold through a broader view of the customer, whereas product improvement had a ceiling of 10 to 20 percent.
- Experience innovation business models are more efficient: Investing in experience innovation does not mean higher costs. Many innovators reduce the cost to serve customers as they create more immersive experiences. Health-care innovators such as CareMore and Iora Health chose to spend a little money up front to hire wellness coaches, who can help patients head off health problems, but in return have seen major drops in much larger downstream acute care costs.
- The opportunities for growth are more abundant: Thinking about “end-to-end” customer ecosystems enlarges the sphere in which a company plays and creates significant adjacent opportunities for new growth, particularly as the activities and services associated with using a product are often 10 times the size of the market for the product itself. In the Apple example, ancillary services (iTunes, iCloud, AppleCare) represent $12 billion a year in incremental revenue.
In summary, experience innovation should not be viewed as a creative exercise or a new marketing gimmick. Instead, it’s a new approach to customers, one that involves understanding how customers’ interactions with products and services are evolving, driven by changes in mobility, technology and social media. Developing capabilities around experience innovation can enable any company to continuously and flexibly adapt its brand to ecosystem shifts and disruptions, offering fresh spaces for differentiation and growth.
Article originally published in Oliver Wyman’s Transport & Logistics in Fall 2014.