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(originally published by Booz & Company)


Making the Most of Customers

The most innovative companies see consumers for who they really are.

A couple of decades ago, Harvard marketing guru Theodore Levitt gamely observed that customers don’t want quarter-inch drills; they would prefer to buy quarter-inch holes. He advised companies not to focus on products but to concentrate on developing specific solutions to specific problems or tangible benefits. In other words, don’t talk about the size of the drill but about the flawless hole the drill bit makes in sheetrock.

Such an approach, advanced at the time, is actually quite limited today. In the current business environment, customers don’t care about buying the drill or even the hole; they simply want to decorate their home by putting up pictures. What they want is to experience the sense of accomplishment and enhanced daily life that comes from pursuing home improvement projects. All those pesky details — flawless holes, drill sizes, and so on — are factors they would prefer not to spend much time thinking about.

We characterize companies that comprehend this as achieving customer advantage, because they have the capacity to leverage a deep understanding of how people absorb and assimilate products and services into their daily routines. The goal of customer advantage is to identify and develop innovations — products and services, new business models, go-to-market models, marketing programs, and service configurations — that fit into and change customers’ lives, are relevant to the everyday challenges customers face, and create transformational customer experiences.

Netflix, the movie rental business founded in 1999, provides a good example of what customer advantage looks like. Cofounder and CEO Reed Hastings saw the hassle that people go through to return movies (maybe they have children in the car, perhaps it’s raining, or they don’t really have the time to swing by the movie rental store) and the frustration they feel when they must pay a late fee. Hastings was once charged a $40 late fee for returning Apollo 13 past its due date. He set out to make the routine of renting and watching movies more rewarding. His company took an existing product (movies to view at home), a simple Web site, and an existing service (regular mail delivery) and molded them to provide a new offering that people accepted and assimilated readily into their lives.

What’s important here is not simply getting movies at regular intervals through the mail with no due dates, although that was the initial attraction for many customers. Netflix’s opportunities are much bigger; it has the potential to create a higher level of customer advantage.

Through its Cinewatch system, Netflix captures how needs and desires change over time for each of its 6 million subscribers. It urges its customers to participate in a rating exercise; the average user rates more than 200 films, and Netflix crunches customers’ rental histories and film ratings to predict what they will like. So each time a customer visits the Web site, his or her experience is truly tailored; as the customer provides more feedback, the company recommends more movies.

A great feature, but that’s really the tip of the iceberg. The information Netflix gathers regarding customer likes and dislikes helps Netflix decide whether to buy a DVD and how much to pay for rights, and whether to sponsor movies and documentaries, even independent ones that otherwise would never be produced. Potentially, as the company bypasses Hollywood for content, it could influence filmmakers, producers, and agents as an arbiter of what people want to see.

For example, based on Cinewatch results, Netflix invested in the documentary Born into Brothels when no studios would touch it. Netflix staffers then recommended the movie and some 500,000 customers eventually rented it. Born into Brothels went on to win the Oscar for best documentary. Ultimately, Netflix can democratize filmmaking, help young filmmakers, and potentially disrupt the entire film industry in its quest to continue satisfying its customers. This is capturing the ecosystem of demand at its fullest.

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  1. David A. Aaker, “The Innovator’s Prescription: The Relevance of Brand Relevance,” s+b, Summer 2004: A brand in decline is often in trouble not because of an intrinsic problem, but because the product category with which it is associated is fading — undermined, augmented, replaced, or subsumed by a new, faster-growing category. Click here.
  2. David Aaker and Erich Joachimsthaler, Brand Leadership: The Next Level of the Brand Revolution (Free Press, 2000): An influential treatise on brand equity. Click here.
  3. Nikhil Bahadur, Edward Landry, and Steven Treppo, “How to Slim Down a Brand Portfolio,” s+b, Autumn 2006: The objective is not merely to divest brands, but to achieve higher rates of growth for the brands that remain. Click here.
  4. Theodore Levitt, The Marketing Imagination (Free Press, 1986): The marketer’s bible, from the Harvard professor who invented the term marketing myopia. Click here.
  5. Richard Miniter, The Myth of Market Share: Why Market Share Is the Fool’s Gold of Business (Crown Business, 2002): Debunking the conventional wisdom, the author argues that many companies maximize market share only to minimize profits. Click here.
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