VRM, Customer Data and Competitive Advantage
The original aim of writing my post on Four Fallacies of Vendor Relationship Management was to challenge VRMers to shed some light on what I see as fallacies in, admittedly, a fairly extreme model of VRM. As Doc Searls said in his rejoinder, nobody has really defined what VRM is yet, as it is an idea that is emerging (and evolving) out of the many discussions swirling around the subject.
So far I haven't seen a strong argument against any of the fallacies that I wrote about.
Fallacy No1 is a case in point. As Rob Knight points out in an excellent post on VRM: Rent, Don't Buy, companies with large amounts of transaction data (thousands of transactions per customer) can mine it for their own competitive advantage. Tesco leads the UK and possibly the world in supermarket retailing because of Dunn Humby's excellence in data mining. Capital One leads the credit card world because of it. All the retail banks, mobile telcos, airlines and utilities are trying them damnedest to extract competitive advantage, no matter how temporary, from the data that they have collected during transactions with customers, that they have organised in vast data warehouses and that they thus (legally) own.
As Akerlof, Spence & Stiglitz point out in their 2001 Nobel Prize for Economics lecture, asymmetric information of the type that large data owners have gives them an advantage in their dealings with and over customers. They know more about customers past behaviour than customers do, (although they still know nothing of the context in which customers buy). And once they have developed their statistical next-best-product models, smart-customised products and implemented them through highly granular customer segmentation, they can reap the benefits at a low per transaction cost. Tesco reputedly manages 20,000 different customers segments. Some Nordic telcos manage 10,000 customer segments. And the master of data-mining, Capital One, makes over 50,000 marketing experiments each year.
There may possibly be more value from dealing with customers individually on customers' terms but the complexity and associated transaction costs of doing so rapidly get out of hand. So why should large data owners bother when they are doing so well without actively ceding any control to customers?
One thing I just don't understand in the talk about data ownership in VRM is the 'rental' idea: where customers manage their data and rent it to sellers when they want to buy something. I can understand how that might work for high-complexity, high-cost products that people are passionate about and where the asymmetry is on their side. Racing mountain bikes for example, where each bike is individually customised and can cost thousands of dollars. Here VRM through a reverse market for buyers, or a multi-side market for buyers and sellers probably makes sense as a potential solution to finding desired components.
But I can't see it working for something like a supermarket where there are hundreds of low-complexity, low-cost transaction items per week, or a mobile telco where there are potentially thousands (and where the customer doesn't even have access to the CDRs).
- How would the customer collect the data?
- Where would they store the data?
- How would they make sense of the data?
- How would they offer their data to sellers?
- Is it really worth it for commodity products like butter, baked bean and toilet rolls?
- If it is too difficult and expensive for small retailers to do, what chance to customers have of doing it?
I think all these questions provide real barriers to VRM for everyday, commoditised products. And almost by definition, it is these products that makes up the vast majority of transaction data about customers.
I would be interested to hear from readers what you think about this interesting topic. It is time that VRM was clearly and unambiguously defined and discussed out in the open. And that average Joe customers were asked whether it makes sense to them. Most of the VRM discussions seem to have been largely devoid of customer input so far. And as all those who work in innovation know, not involving customers at each stage of the innovation process is often a prelude to another expensive flop in the market.
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Graham Hill, Four Fallacies of Vendor Relationship Management
Rob Knight, VRM: Rent, Don't Buy
Doc Searls, A little understanding goes a short way
Akerlof, Spense & Stiglitz, 2001 Nobel Prize for Economics