Edge-Based Customization

Customization is the ultimate weapon against commoditization. If you can truly convince customers that the product they are buying is unique to them and built for them, then it becomes quite hard to compare it to a competitive equivalent. The ultimate form of this core strategy is bespoke, or custom-made. Literally, a product is produced from raw materials to the customer’s exact specification; it is a one-of-a-kind. There is no prefabrication in this model; the manufacturing or production process occurs entirely after the order is secured. The immediate example of this is high-end tailoring: a customer has detailed measurements taken, and skilled tailors literally cut cloth from spools of fabric and sew them together to make a piece of clothing to the customer’s exact measurements.

There are many other examples; having a custom home built takes on a similar model, as does a major engineering project such as commissioning the construction of a new ship. In these cases, the customer specifies in advance everything he wants to see in the product and the supplier builds to that specification. In our circle diagrams in chapter 2, these would represent a perfect eclipse situation. The customer permission set is fully met, since the offer has been built specifically to do so. The trouble with this model is that you cannot use any scale efficiencies, and you need to have a highly skilled workforce to execute such customized production efforts.

If you have ever explored tailored clothing providers, you might have discovered offerings of made-to-measure custom clothing. This apparel is marketed to offer you a more personalized product at much more affordable prices than it would cost for true bespoke.¹ These companies rarely make your product from scratch, but rather have a broad range of templates. While they take measurements as a bespoke tailor does, their production solution is a modular one. Essentially, they configure your product using a range of predetermined elements. The product you buy is indeed relatively made-to-order and has been configured to feel sartorial enough to satisfy all but the most discerning customers. They can offer it to you at a lower price because there are indeed some economies of scale, and this model requires less specialized labor than truly personalized tailoring. Similar modular solutions exist in home building and industrial products. In all cases, the companies are trying to use customization to avoid price comparison and the threat of commoditization.

In much the same way, edge-based customization can be a faster and easier way to offer customization. It involves the active use of edge strategy to enable product configuration without having to make fundamental changes to how you produce your core offering. Identifying product edges to your core provides the building blocks so that a customer can customize his own offering along prioritized dimensions.

Hotels are an interesting example of a service industry that is finding new ways to execute exactly this strategic move. Some hotel companies have realized that they must pursue a more sophisticated segmentation of guest needs and compete in a more “customized” way to prevent commoditization of their offerings. Today they are starting to use edge-based customization to compete.

At a high level, there are four sets of actors in the hotel business: property owners, management companies, distribution partners, and the hotel brands themselves. Since many of the big hotel companies have gone “asset light” over the last couple of decades, the property owners are typically real estate investment trusts, wealthy individuals, or family funds.² The owners are focused on identifying underserved locations, selecting valuable real estate, building attractive facilities, and striking deals with the other three actors. The management companies and distribution partners play important roles, but are largely middlemen taking direction, and fees, from either the property owners or the hotel brands. The hotel brands are the drivers of product innovation; they are focused on defining and managing brand standards, devising marketing messages, and improving the systems (computer reservations, loyalty programs, and so on) that pump customers into their networks.

The traditional way to make money in the hotel industry has been to bet successfully on the right property, ensure consistent service delivery, and then ruthlessly manage costs to disciplined standards, while not overpaying for distribution. This formula ensures that a hotel is on the right side of the supply-demand equation through a full economic cycle. Thus, there has historically been little tolerance for anything that adds operational complexity, such as nonstandard guest options. Most hotels still offer scant choices for customers: defined check-in and checkout times, limited room selection, and some very basic extras, such as a minibar and on-demand movies.

Commoditization remains a continuous threat in the hotel industry as well. Online travel agencies are a double-edged sword for hotels. While they provide valuable customer flow, they also charge commissions of 15 percent to 20 percent and simultaneously facilitate margin-damaging price discovery.³ Moreover, they compete, with their own loyalty programs, to be customers’ first point of call for every time they stay. Commoditization pressures are only exacerbated by the fact that hotels have traditionally classified themselves by price tier (for example, luxury, upscale, midscale, budget, and so on), allowing for quick comparisons across highly comparable star-rating alternatives in popular locations.

However, hotels have started to fight back. The big hotel companies are all racing to develop lifestyle brands that resonate with customers on the basis of personality versus the traditional metrics of location, star rating, room size, and price.⁴ But building or buying new hotel brands is an expensive business. It takes ages to execute. It also doesn’t solve the original problem with the thousands of hotels that are already victims of commoditization pressure. For the bulk of the business, edge strategy can provide a simpler, higher ROI alternative.

Armed with a trove of data, some hotel luxury brands have begun to create options for their customers. These options are classic outside product edges. They are not new adjacent offerings, but rather enhancements that lie just on the outer rim of what could be considered the core hotel offering. Examples include reaching out to customers who were known golfers to prebook tee times, helping known foodies schedule reservations at in-house restaurants and spas, or selectively upselling to better rooms or suites prior to arrival. While many of these options existed in some form or fashion, most hotels had not explicitly parsed out and presented them in this way before. The edge strategy is clearly to allow the core transaction to happen naturally and then be proactive about merchandising selective outside product edges as separate add-on enhancements.

This approach is transforming a relatively competitive product, a luxury hotel room, into a more customized experience. The enablers of this strategy were intrinsically present; the existing hotel facilities, flow of guests, and communication channels were all existing foundational assets that could be leveraged. The success of this strategy does not require new customers. Nor does this approach create truly new adjacent services. It simply uses edge-based customization to redraw the boundaries around the core offering in a way that makes it easier for guests to recognize and select into additional value. An edge strategy such as this is fabulously less expensive than other types of hotel innovation, such as building and branding new concepts.

What we have described is a migration from a relatively standard core product to a more malleable, customizable construct. Sometimes, this begins with selective unbundling of features to create more flexibility. Always, it involves creating enhancements that can be upsold to deliver a near-unique solution. But the inside and outside edges that enable edge-based customization are only the first move in defending against commoditization. The next move involves identifying journey edges that are used to turn a product transaction mentality into the deeper customer connections that are made by providing solutions.

Edge-Based Solutions

Most decommoditization efforts begin and end with the construction of solutions. Solutions redirect customers from haggling over the prices of features and benefits and instead focus them on completed outcomes. As we will see, edge-based solutions are often the easiest and least risky way to enact this strategy.

A salient example of where edge-based solutions are already being put in practice today is the industrial gas industry. Air Products & Chemicals (Air Products) provides a great illustration of how to use journey edges to migrate customers from product decisions to broader mission decisions and, in the process, remove some of the transactional mentality that leads to commoditization.

Air Products is a more than $10 billion supplier of industrial gases, performance materials, equipment, and technology. It is the world’s largest provider of hydrogen and helium and has leading global supply positions in markets such as semiconductor materials, refinery hydrogen, coal gasification, natural gas liquefaction, and advanced coatings and adhesives.⁵ While scale represents a significant barrier to entry in this business, various players compete in the space, and hydrogen and helium, as basic elements, are prone to commoditization pressures.

To defend against these pressures, Air Products has become an adept edge-based solution marketer. The company carefully wraps services, which all fit our definition of journey edge offerings, around its core business of gas supply to the air separation facilities. This allows Air Products to move away from marketing the underlying gases and instead focus on complete solutions. For example, the high-purity gases such as nitrogen, oxygen, and argon that are used in semiconductor fabrication require input from Air Products.⁶ If a semiconductor customer made its decision strictly on the best price for the commodity elements that it needs for its distillation, Air Products would be unlikely to eke out an acceptable margin. However, the company not only offers a variety of optional services but positions them alongside the gas supply as broader solutions. For example, it offers, among other services:

• Plant assessment services that evaluate customer facilities and help to increase production, efficiency of power consumption, safety, and reliability.
• Operations and maintenance services that staff customers’ plants with experienced personnel to assist with ongoing requirements.
• Spare parts and inventory control to ensure that mission-critical repairs are managed from a single source.
• Advisory services on operating at peak efficiency and availability by leveraging Air Products’s experience across hundreds of comparable industrial gas plants.
• Safety training on how to best handle and work with the gases and related equipment within customers’ facilities.⁷

Selling solutions is a well-understood theme. Solutions essentially help companies sell more core products by explicitly calling out a broader need, augmenting appropriately, and giving it a meaningful wrapper. What makes edge-based solutions so attractive is that the highest-leverage applications tend to be at the edge of the customer journey. It is the first place to look to assist with more of the customer’s mission in a way that is both natural and credible.

In the case of Air Products, the supply chain is already established, and technical engineers are routinely onsite at their customers’ operations. Any service that walks another step on the journey to how the gases are ultimately being used helps transform a flow of transactions into a true partnership. In this manner, Air Products people and capabilities become virtual extensions of their customers’ own staff.

Armed with edge-based customization and an edge-based solutions framework, you have the building blocks needed to start reconstructing newly calibrated offers. These are not wholesale changes to the core business, but rather a gentle redefinition around the edges to present different versions of the offer that are more holistic, easily recognizable, and highly attractive solutions for different customers.

Edge-Based Bundling

Bundling is a process by which you roll together products or product features into a single offering. Bundling makes buying easier, but it can also reduce customers’ ability to directly benchmark prices on core products. It also underpins the third key application of edge strategy to help preserve margins in the face of commoditization threats. Specifically, edge-based bundling is the process by which edge options that either have been carved out of the original offer and/or have been augmented are proactively reassembled in a way that resonates more strongly with distinct customer segments.

Bundling is not always required; in fact, sometimes it is a suboptimal marketing strategy, for example, when you are upselling with a limited number of options. However, when edge-based customization multiplies the number of options, edge-based bundling can help simplify the sale and expand the pie. Edge-based bundling recognizes that customers do not immediately see the benefits of edge-based customization and solutions. It targets very specific customer segments in ways that are relevant to them.

The aim of this third strategic move goes beyond aggregating attributes that hang well together and, more pointedly, focuses on cleverly combining edge and core offerings to build powerful differentiation. Perfectly executed, edge-based bundling should not only facilitate the sale but also enhance the overall value proposition. The components used in edge-based bundling are not merely additive, but synergistic.

The story of the US telecom industry, introduced in chapter 5, demonstrates how an outside product edge, Caller ID, was used to enhance margins through effective upselling. Where the telecom companies went next provides an intuitive illustration of how further development of edge strategy can also preserve margins in the face of commoditization trends.

For roughly a century after Alexander Graham Bell received the first telephone patent in 1876, the revenue model in telecommunications centered on minutes of access (that is, how long you talked on the phone). Over time, different rate cards were developed that split phone charges into local, long-distance, and international calling. Also, the associated cost-per-minute billing often reflected bandwidth demands that increased during busier times of the day or week. However, in the latter part of the twentieth century, technology marched on, allowing a host of edge products to proliferate on largely similar technical infrastructure.

Caller ID was certainly not the only enhancement introduced. Telecoms enabled other value-added services such as the ability to convey messages in absentia through voice-mail boxes and the ability to field and toggle inbound calls through call-waiting.⁸ None of these was fundamentally the core service. Nor were any of these really adjacent businesses. They were optional ancillaries that enhanced the core offering for those who valued these specific features.

As we discussed earlier, each of these edge-based options leveraged the foundational assets of the telecom provider in a powerful way. Only incremental investment was required to present options that paired with the core access model. First, the enhancements tended to generate the highest gross margins of any service offering (since the core access model already bore so much of the cost to enable them). Second, the pairing encouraged customers to view the offering as more of a differentiated solution. No longer were quality of service (which quickly converged on an acceptable standard) and price (which was easily comparable across competitive rate cards) the only meaningful attributes.

Value-added services allowed customers to construct a suite of products that addressed a broader mission: communication on their own terms. Additionally, some of these new services had a learning curve that promoted customer continuity and, in turn, helped blunt commoditization. By investing the time to set up a voice-mail box and by learning the system of speed-dial codes required to access, play, and delete from that box, customers effectively erected their own barriers to switching to a competitive service.

Then something unsurprising happened. In the 1990s telecoms grew enthusiastic about the lucrative nature of their ancillary offerings and began to multiply the options available.⁹ Before long, they were bombarding customers with too many choices and experiencing diminishing returns from introducing new enhancements. Creating so many options had made it unwieldy for customers to evaluate.¹⁰ Worse, as competitors mimicked each other’s offers, the most important ancillaries became as easy to price-shop as the original rate cards.

The answer to so many options (now clear in retrospect) was to start rebundling products into a handful of easy-to-digest plans.¹¹ At the end of the decade and into the early 2000s, telecoms targeted plans at individual customer segments and tailored relevant features for each segment. For example, some bundled plans offered flat-rate calling on weekends or weeknights, or to other customers of the same carrier.¹² Telecoms offered numerous calling-plan bundles, often with relevant edge services like call-waiting, with slightly different features to meet the specific needs and calling patterns of different customers.¹³ For example, they met the needs of families by discounting long-distance access rates during nights and weekends bundled with unlimited local calling and directory assistance.¹⁴ As local and long-distance calling became more commoditized and telecoms offered unlimited calling plans, popular bundled services like call-waiting and Caller ID became important selling features.¹⁵

Often, the bundled edge strategy can be even more successful than the original incarnation. Instead of selecting, say, two value-added services à la carte, customers often buy the equivalent of multiple value-added services, including those they wouldn’t have chosen as stand-alone services. What’s more, when product edges are wrapped around the core service, they are relatively fast and easy to market.

Edge-based bundles also make value easily recognizable. In the telecom value-added services example, customers were quite happy as they perceived that they had found a solution that mapped to them specifically. By bundling edge offerings with the core, the phone companies were able to merchandise their offer with much more tailored marketing that amplified the most valuable characteristics of edge-based customization and edge-based solutions.

The telecom space has remained intensely competitive over the ensuing years, with high monthly attrition as the major players have continued to outpromote each other, buying valuable customers out of contracts in the endless quest for temporary share gains.¹⁶ But two things are certain. First, telecom gross margins have consistently returned to 50 percent to 60 percent, again and again, over the last twenty years.¹⁷ Second, edge strategy was critical to achieving this margin preservation in the face of strongly commoditizing forces.

The caveat here is that bundling has been around forever and will always be an important core marketing strategy. It is not always the best way to merchandise edge products that are sometimes better presented à la carte, as we saw in chapter 5. However, there is a special case when the number of edges being marketed becomes burdensome for the customer, undoing some of the good that is done by edge-based customization and edge-based solutions. In these cases, edge-based bundling can play an important role in cutting through the noise and reaching the customer again.

Perhaps the most important aspect of edge-based bundling is that it brings us full circle to a curated set of offers. As we’ve seen, by using these three strategic moves, companies can deconstruct and reconstruct products by slightly modifying their edges in a powerful way. This means they can (1) innovate more quickly and cheaply, (2) expand from a product sale to a more holistic solution sale, and (3) formulate or reposition variants of the solution in a more targeted way to individual customer segments.

Bringing It All Together

The three strategic moves described here work best in conjunction. Often we see a familiar pattern as companies introduce, embrace, and then actively promote ancillaries. For example, edge-based bundling amplifies the power of the edge strategies that precede and enable it. It can make it easier to understand how the choices implied by edge-based customization go together with the core product. It can make solution-focused marketing more recognizable.

Edge merchandising is a system that makes edge offerings resonate as strongly as possible with customers. With a focus on presenting the right offer to the right customer at the right time, edge tactics evolve into a cohesive marketing strategy.

Edge strategy often commences with an examination of the basics. Sometimes this involves unbundling core elements. As discussed in earlier chapters, this is the realm of inside product edge strategy. This unbundling can create a level playing field across competitors to deal with the margin compression imposed by cost creep or simply create the flexibility required to better mix offer components across different customer segments.

Then there is the careful consideration of upselling. Companies can gradually introduce various add-ons and complementary secondary products and services until each customer segment can select what it requires to satisfy its unique product needs. These are ideally based on outside product edges, benefiting from the leverage of foundational assets and often designated as enhancements to the core offer. They also include offering those inside edge elements previously stripped from the core offer so that customers who value them can add them back in.

The next step involves elevating the customer dialogue from a product decision to a mission decision. In order to move the customer’s mentality from a defined permission set to a broader mission space, the company must reframe the offering from its current overlap with the customer’s journey to include another step or two along a journey. By accessing journey edges, and the associated foundational assets that support them, companies can harness the power of moving from products to solutions with only incremental relative effort.

Finally, as edge offerings proliferate, companies should reconsider edge bundling. This time, the reassembling of core and edge offerings can sometimes be a means to more efficiently present the value conferred by the three preceding steps. This is done by targeting customer segments very specifically and calibrating the offers in a way that resonates with each. In this way, the core product also benefits from the power of edge offering accompaniment. This common progression can be characterized in the edge merchandising matrix (see figure 7-1). The matrix delineates the three strategic moves that make up edge merchandising and the natural roles of inside, outside, and journey edge strategies in this system of combating commoditization.

If you pursue adjacent spaces (either new products to existing customers or new customers for existing products), you are departing from your core business and taking on meaningful risk. If these are sensible bets in an efficient market, the reward for these departures should be roughly proportional to the risk absorbed. But that also assumes that there are enough bets for everything to average out. The problem is that many bets are not very sensible, or the market is not sufficiently efficient, or executives may simply not have enough chances for everything to average out.

By contrast, the power of edge economics lies precisely in its asymmetry. The amount of upside far outweighs the downside, measured in either cost or risk or both. There is no trick here, no free lunch. Part of the lunch was already paid for, so to speak, and it often sits unnoticed on the edge of the table.

Practitioner’s Notes

• Introducing limited operational complexity (through ancillaries) can be a good compromise between absolute core efficiency at one end of the spectrum and highly configured offerings at the other.
• You can apply edge strategy to familiar marketing tools like customization, solution selling, and in certain cases, bundling, to provide an easier, cheaper, and highly effective method to combat commoditization.
• Edge-based customization enables product configuration without having to make fundamental changes to how you produce your core offering. When customers are involved in the final configuration choices, they become vested and, by extension, impute switching costs. Product edges are specifically valuable in this effort because they provide some of the best options to enlist customers in helping create modular offerings that resonate.
• Edge-based solutions are attractive because they are grounded in the customer journey. The art of solution marketing is to shift from individual product sales, which are necessarily transactional, to elevated discussions about helping customers complete missions. Edges are powerful auxiliaries in this effort; since they leverage foundational assets, edges help frame solutions in a way that is more natural and credible.
• When the number of edge-based options proliferates, the tyranny of choice can set in, making it harder for customers to decide and more difficult to close the sale. When this happens, edge-based bundling can be a useful construct. Essentially, this strategy boils down to wrapping multiple edge-based offerings around the core offering in a way that makes the value more recognizable to individual customer segments.
• In summary, edge-based merchandising is a holistic framework that applies the three aforementioned strategic moves in an orchestrated way. Edge offerings are often secondary in customers’ considerations (after the core). Therefore, the onus is on you to present the right offer to the right customer at the right time to cut through noise and distraction. Doing this well, however, can truly tip the balance away from commoditization and back in your favor.