Consumers, quite simply, want customization. The report released last week by the Business Development Bank of Canada, coinciding with Small Business Week, notes that consumers have progressively moved away from those standardized, mass-produced products, synonymous with the 20th-century industrial revolution, in favour of custom-made solutions that fit their specific needs, and in part have become more engaged in product creation.
To show how broad reaching this trend has become, in a survey this year, nearly three-quarters of consumers claimed to want personalized products and services. Personalization was overwhelmingly deemed the most influential factor determining value for money. Offering personalization can easily raise product value, and promote higher brand loyalty. Both are bound to increase profit margins.
This trend has led to the emergence of two different strategies in response: companies expand their product lines to better address consumer preferences, or develop “mass customization” techniques. The latter production process allows companies to combine two contradictory techniques: mass production and customization. On paper, this approach should deliver tailor-made solutions to customers at prices and lead times that match those of traditional mass-production products. It should also have the potential to unlock new business models for Small or Medium Enterprises (SMEs).
Product Lines are Expanding
To satiate the desire for personalized products, companies have diversified their product lines to appease every consumer taste. The report notes examples such as Tropicana, which has increased its juice selection from six in 2004, to more than 20 today, and with more flavours on the way. Similarly, BMW and Audi have increased their number of models by 83 per cent and 113 per cent respectively over the past decade.
This approach to product diversification can backfire however, resulting in failed product launches, huge overstock and significant upfront costs, while at the same time alienating clients.
A greater variety of options, usually leads to more dissatisfied people, due to raised expectations and unattainable perfection. This reality can lead companies to reduce their product complexity, narrowing choices for consumers. Some companies see gains in this approach, such as Procter & Gamble, who saw a 10 per cent increase in sales after reducing the Head & Shoulders shampoo variety from 26 to 15. On the other hand, Tropicana tripled its juice assortment and saw a sales increase of 23 per cent This mix of contradicting results has left many companies perplexed on how best to pursue a strategy that offers product personalization, yet limits consumer confusion and dissatisfaction.
Mass Customization as a New Business Model
Manufacturers that adopt a “made-to-order” approach have an unprecedented edge in today’s market. Not only do they not have to stock finished goods, but also create a better alignment between the needs of customers and the supply, since the consumer defines the features and product configuration. Personalized orders also allow a manufacturer to better understand its market, and adapt their customization options accordingly.
The BDC report notes recent reviews of companies employing online configuration tools confirming that allowing consumers to customize products in real time leads to higher conversion rates, with sales increasing more than 80% in some cases, and average order sizes increasing by up to 20 per cent. In addition, the ability to view customized products before ordering can reduce returns by up to 33 per cent. Meanwhile, the use of dynamically generated digital previews that allow customers to evaluate a product before it is manufactured can reduce costs by up to 50 per cent.
Ideally, customized production should be kept in sync with actual demand, which eliminates most of the liability associated with stocking inventory – warehouse costs, cash flow front- loading, product obsolescence or discount sales of surplus inventory. Firms also regularly discover new market opportunities by constantly monitoring customer preferences, reducing capital commitment and overproduction in the process.
The actual creative aspect of customizing a product can leave customers with a positive impression of the actual sale and affect loyalty as well. The so-called “I designed it myself’’ effect increases a customer’s sense of ownership, as the user is not merely buying a product but also doing something creative. Building a superficial engagement with emotionally-driven brands and marketing no longer seems to be as effective with customers as it once was. The recent BDC-Ipsos survey showed that in Canada, on average, only about one in three consumers considers the brand a decisional factor for most of their purchases. This makes it even more crucial for companies to foster truly engaging interactions with their products to keep their customers loyal.
The report continues that with 900 company websites in 29 countries offering online configuration tools that allow customers to customize their products, Germany (388 sites) and the United States (346) represent 82 per cent of the market. Only six advanced canadian companies offer online customization tools. The report/database being noted is not exhaustive but includes the most advanced mass customization companies. Mass customization can be adapted to practically every product category imaginable, ranging from nutritional bars, beverages, cereals, chocolate, coffee, to handbags, garage doors, cutting boards, electrical and signal cables, and even to conveyor belts, facade cladding, industrial gases, and lucky horseshoes.
One of the major advantages of mass customization is that it allows companies to move away from a purely price-led competition that destroys margins and favours volume-driven multinational competitors that outsource production. Moreover, some SMEs have turned emerging consumer behaviours like “showrooming” to their advantage. While some traditional retailers are struggling to counter this practice by slashing prices and charging consumers a fitting fee or browsing fee, others are embracing the trend. Companies, such as Clearly Contacts, which opened physical locations in Vancouver earlier this year, pick high-traffic locations where customers can touch and feel their products, inspect customization options, and take precise measurements in order to properly customize the final product, which will be delivered to them directly.
Some companies are pushing the boundaries of customization by simultaneously using crowdsourcing and advanced manufacturing techniques to create consumer-generated products. Threadless from skinnyCorp was one of the first SMEs to successfully implement this concept. Its business model revolves around user-submitted t-shirt designs that the company produces after the community votes on them.
Other SMEs have recently taken this concept to a whole new level. Quirky allows its users to submit new consumer product ideas that other users then collectively refine and price. The company then makes and commercializes the products that gathered the most support. in essence, Quirky manufactures consumers’ desires…an approach that clearly shows the power of consumer- driven production and shatters the traditional product value-chain hierarchy.
With new manufacturing technologies, such as affordable automation and 3D printing, and greater opportunities to interact with consumers through co-creation, SMEs can respond more effectively to consumer demands.
Strategies for SMEs
Striking a balance between increased product personalization and counterproductive variety has been a very costly guessing game for most companies until now. These experiments have often led to value-destroying undertakings. Selecting the features that will truly add value in customers’ minds, while limiting unnecessary supply, requires a smart and innovative customization approach. This means developing products that deliver on the expectations of consumers, but do not simply overload them with choices. Such a strategy is critical to avoid decimating current product lines, holding excessive inventory, complicating production and disengaging consumers.
Involve Consumers in Product Creation
By increasing consumer involvement in product design, companies can mitigate some of the traditional risks of new product launches. This does not require a mass-customization strategy. Companies can get customers more involved in developing traditional products through open-innovation tactics, such as crowdsourcing. Providing a platform for users to suggest modifications or simply encouraging customers to provide product feedback can result in tangible and affordable innovation.
Target Real Consumer Needs
SMEs can benefit by offering customers personalization options that enhance the product’s functionality, such as customized fit, as opposed to purely cosmetic or superficial features, like engraving. Options that do not target real needs will simple disengage customers due to the “paradox of choice” phenomenon.
Optimize Stock levels by focusing on Top Products
Unfocused customization can create an unsustainable logistical burden that increases production complexity and decreases profitability. SMEs can avoid this by keeping high-volume variants of a product in stock, while offering structured customization to meet other needs and capture full client share.
Reorganize the business model around Mass Customization
With a premium based on the added emotional attachment that personalization brings, companies can simultaneously maximize margins and increase loyalty. From an operational standpoint, mass customization can help SMEs decrease inventory liabilities, quickly adapt to changing consumer tastes and relocate production to local facilities. This approach allows SMEs to manufacture customized products effectively, quickly and in small batches.
Broaden product line-up with simple personalization options
SMEs can extend their line-up with an approach that satisfies a wider range of customers while keeping costs in line. For a typical company, this could mean offering simple extensions of their basic products. For example, a restaurant could offer a traditional menu but charge a premium to allow customers to modify their meal according to their preferences (e.g., charge 5 per cent more for a gluten-free or allergen-free version of a meal).
Stay locked to Vancity Buzz for our continued, week-long coverage of BDC Small Business Week, and the five consumer trends shaping the future of Canadian business.