Chasing Customers
A never ending pursuit of an excellent product
Intro
Like many people in the past decade my view of disruptive innovation is largely influenced through Clayton Christensen’s “Innovator Dilemma” book and thinking on the topic. This thinking has been challenged recently by two articles that I have read, 1) Amazon’s Shareholder Letter and 2) Stratechery post on “Divine Discontent”. The main challenge that I see is that the fundamental nature of disruptive innovation assumes that customer expectations grow at a slower rate than product advancements. This may be correct for heavy industries, but in software driven products I believe the trajectories are reversed. Through this post I will challenge the Disruptive Innovation model and lay out a case for how to build a business to meet this constant drive for improvement.
The Customer Experience Treadmill
The best place to start on the discussion of the customer experience comes from the most recent Amazon Shareholder Letter. In the excerpt below Jeff Bezos shares his thoughts on customer expectations.
One thing I love about customers is that they are divinely discontent. Their expectations are never static — they go up. It’s human nature. We didn’t ascend from our hunter-gatherer days by being satisfied. People have a voracious appetite for a better way, and yesterday’s ‘wow’ quickly becomes today’s ‘ordinary’. I see that cycle of improvement happening at a faster rate than ever before. It may be because customers have such easy access to more information than ever before — in only a few seconds and with a couple taps on their phones, customers can read reviews, compare prices from multiple retailers, see whether something’s in stock, find out how fast it will ship or be available for pick-up, and more. These examples are from retail, but I sense that the same customer empowerment phenomenon is happening broadly across everything we do at Amazon and most other industries as well. You cannot rest on your laurels in this world. Customers won’t have it.
How do you stay ahead of ever-rising customer expectations? There’s no single way to do it — it’s a combination of many things. But high standards (widely deployed and at all levels of detail) are certainly a big part of it.
There are a couple statements from the above that really stood out to me.
- [Customer] expectations are never static — When you are designing products you need to think about how you can constantly improve the product. This is why I believe a microservices architecture is the only way to operate in today’s tech world. Any company that has a monolithic tech structure is doomed to fail.
- Yesterday’s ‘wow’ quickly becomes today’s ‘ordinary’ — This speaks to the idea that it is increasingly difficult to exceed customer expectations.
The second article I referenced was Ben Thompson’s Stratechery Post. I especially like the comment he made that if the ‘classic’ model of disruption were true then Apple’s moves a few years ago to introduce lower priced models would have been the right move. In retrospect, the best moves Apple has made is to continuously push the customer expectations higher. To me the open question is how far Apple can go. It will be interesting to see if they are able to jump S-Curves like they did from the iPod to the iPhone. Quick reminder that the iPod was 60% of Apple’s revenue in 2006 and now is not even reported out. Today the iPhone is 60% of revenues.
Clayton Christensen’s Disruption Model
One of the fundamental premises of the model is that what causes failure for incumbent companies is that they overshoot the customer expectations and a new entrant is able to come in (article from HBR).
Here is a quote pulled from “Innovator’s Dilemma”.
The second element of the failure framework, the observation that technologies can progress faster than market demand…means that in their efforts to provide better products than their competitors and earn higher prices and margins, suppliers often “overshoot” their market: They give customers more than they need or ultimately are willing to pay for. And more importantly, it means that disruptive technologies that may underperform today, relative to what users in the market demand, may be fully performance-competitive in that same market tomorrow.
This isn’t to say that someone can’t start down market and surpass, it is just that the reason for overcoming is likely not due their competitor overshooting the market needs. My belief is that it is due to the incumbent reaching the top of their S-curve and no longer being able to push up the customer experience.
Example — Customer Expectations for Tech Platforms
The challenge that I have experienced is that the customer experience expectations are often times rising faster. In fact the way I see it is that the simplest experiences are the ones that set the bar for the rest of the market. For home services the benchmark for customers on the experience is driven by ecommerce and solutions like Lyft and Uber. Unfortunately those solutions are much easier to control and are improving rapidly.
Thus the trajectory looks like the below where the slope of the customer expectations curve is rising faster than the rate of change for how well we can improve our product. The curve for a company and their product is also more like an s-curve than a straight line. It takes time for a company to start making meaningful progress, then they hit an inflection point before reaching a theoretical max.
As shown in the above, what I have seen is that a new entrant leapfrogs many of the steps. For this specific example let’s discuss what has happened:
- Microsoft: They were the king of the desktop computing era. They got to this part by building a great ecosystem with a volume licensing model to attract enterprises. This same strength made it very difficult to enter the consumer market.
- Google: They are the kings of search and thus the guardians of the internet. They leveraged the tools that Microsoft had built to create a search engine available for all. This relationship with homeowners made it difficult for Google to create a great social network (sorry Google plus)
- Facebook: They are the kings of social and thus the data that connects everyone together. To get where they are they made a good bet on mobile and became a critical utility for consumers. While they have been under fire over the past year, they still have over 2bn users.
Some of the keys to a new power for each of the different stages is due in part to the new entrant lacking the legacy business model and operating model. As part of the operating model is the technical architecture that these companies are built upon to power their products / services. Google with Android was able to bridge the gap between desktop to mobile, though this was less pronounced of change given their focus on the browser. These types of shifts like what Google has done help to elongate the S-Curve. For companies to continue to meet customer expectations they need to be able to jump S-Curves. I would argue that Google is best positioned to jump the S-curve for voice based UI.
Mary Meeker’s Annual Present to the World
One thing that you will notice within her report each year is how the expectations for customers continue to increase and how fast new technologies are being adopted. I have a link to the full report in the References section, but wanted to share a few screen shots.
One of the things that really stood out to me was how Google and Amazon have continued to push forward their experience to meet the growing needs of consumers. Looking at these images it is hard to believe that was the experience that I felt was good then. These two companies are defying the disruption theory by having a relentless pursuit of a better experience.
In Closing
I believe it is valuable to think about how to disrupt incumbents, but the fundamental premise should be more about the S-Curve of their trajectory and how you jump to the next S-curve.
One last example I’ll provide is from the gaming industry, where for the past 30 years there has been a revolving market leader among Nintendo, Sony, and Microsoft/Xbox.
My final point: If Expectations are rising how do you adjust your trajectory and leapfrog to another S-Curve?
