Customer Interface (COMPONENTS OF AN EFFECTIVE BUSINESS MODEL)

                  Customer interface—how a firm interacts with its customers—is the fourth component of a business model. The type of customer interaction depends on how a firm chooses to compete. For example, Amazon.com sells books solely over the Internet, while Barnes & Noble sells through both its traditional bookstores and online. Sometimes a company’s customer interface will change as conditions change. For example, until 2001, Apple sold its products through retailers like Sears and CompUSA (CompUSA is now a part of a larger firm called TigerDirect.com). Apple experienced sales declines in the late 1990s, and in 2001 made the strategic decision to take control of retail sales of its products, in part to “own” the customer retail experience. The first two Apple stores opened in 2001 in McLean, Virginia, and Glendale, California. The Apple stores have been a hit, and are partly responsible for Apple’s surge in popularity. In 2002, Apple enhanced its stores by adding the Genius Bar, which is a place where customers can receive technical advice or set up service and repairs for their Apple products. This added dimension of Apple’s customer interface has provided the company a forum to physically interact with people who have questions about Apple’s products or need help with a repair.36
                    For a new venture, the customer interface that it chooses is central to how it plans to compete and where it is located in the value chain of the products and services it provides.37 The three elements of a company’s customer interface are target market, fulfillment and support, and pricing structure. Let’s look at each of these elements closely.
Target Market 
                    A firm’s target market is the limited group of individuals or businesses that it goes after or tries to appeal to, as discussed earlier in this book. The target market a firm selects affects everything it does, from the strategic resources it acquires to the partnerships it forges to its promotional campaigns. For example, the clothing retailer Abercrombie & Fitch

targets 18- to 22-year-old men and women who are willing to pay full price for trendy apparel. So the decisions it makes about strategic resources, partnerships, and advertising will be much different from the decisions made by Chico’s, a clothing store that targets 30- to 60-year-old women.

                    Typically, a firm greatly benefits from having a clearly defined target market. Because of the specificity of its targeted customer, Abercrombie & Fitch can keep abreast of the clothing trends for its market, it can focus its marketing and promotional campaigns, and it can develop deep core competencies pertaining to its specific marketplace. A company such as Gap Inc. has a larger challenge because its stores appeal to a broader range of clientele. In fact, when a retailer such as Gap starts offering too many products, it typically begins breaking itself down into more narrowly focused markets so that it can regain the advantages that are enjoyed by a singularly focused retailer such as Abercrombie & Fitch. Gap has done this successfully and now has a diversified collection with five brands Gap, Old Navy, Banana Republic, Piperlime, and Athleta.

Fulfillment and Support 

                   Fulfillment and support describes the way a firm’s product or service “goes to market,” or how it reaches its customers. It also refers to the channels a company uses and what level of customer support it provides.38 All these issues impact the shape and nature of a company’s business model.

                    Firms differ considerably along these dimensions. Suppose that a new venture developed and patented an exciting new smartphone technology. In forming its business plan, the firm might have several options regarding how to take its technology to market. It could (1) license the technology to existing smartphone companies such as Nokia and Samsung, (2) manufacture the smartphone itself and establish its own sales channels, or (3) partner with a smartphone company such as Samsung and sell the phone through partnerships with the smartphone service providers such as AT&T and Verizon. The choice a firm makes about fulfillment and service has a dramatic impact on the type of company that evolves and the business model that develops. For example, if the company licenses its technology, it would probably build a business model that emphasized research and development to continue to have cutting-edge technologies to license to the cell phone manufacturers. In contrast, if it decides to manufacture its own cell phones, it needs to establish core competencies in the areas of manufacturing and design and needs to form partnerships with cell phone retailers such as AT&T, Sprint, and Verizon.

                    The level of customer support a firm is willing to offer also affects its business model. Some firms differentiate their products or services and provide extra value to their customers through high levels of service and support. Customer service can include delivery and installation, financing arrangements, customer training, warranties and guarantees, repairs, layaway plans, convenient hours of operation, convenient parking, and information through toll-free numbers and Web sites.39 Dell Inc. for example has a broad menu of tiered

services available to provide its corporate clients the exact level of support they

need and for which they are willing to pay. Making this choice of services available

is a key component of Dell’s business model.

Pricing Structure 

                    A third element of a company’s customer interface is its pricing structure, a topic that we discuss in more detail in Chapter 11. Pricing structures vary, depending on a firm’s target market and its pricing philosophy. For example, some consultants charge a flat fee for performing a service (e.g., helping an entrepreneurial venture write a business plan), while others charge an hourly rate. In some instances, a company must also choose whether to charge its customers directly or indirectly through a service provider. A popular way to sell a service on the Internet is via the freemium pricing structure, as described in Table 6.1. The word freemium is a blend of the words free and premium. Businesses that utilize a freemium pricing model give away a basic product or service for free, and offer premium services on a tiered pricing plan.

                   Firms differentiate themselves on the basis of their pricing structure in both common and unusual ways. In general, it is difficult for new ventures to differentiate themselves on price, which is a common strategy for larger firms with more substantial economies of scale, as discussed earlier in the chapter. There

are exceptions such as Warby Parker in eyewear and 99designs in graphic design—firms that have been price leaders since their inception. Similarly, there are several examples of firms that have started primarily on the basis of featuring innovative pricing models. The most noteworthy is Priceline.com, which pioneered the practice of letting customers explicitly set prices they are willing to pay for products and services. CarMax, which features a “no-haggle” pricing policy and sells new and used cars through its showrooms and Web site, is another example. The company’s slogan is “The Way Car Buying Should Be.” CarMax offers its customers a low-stress environment by presenting them with what it believes to be a fair price, with no negotiations.

                   In summary, it is very useful for a new venture to look at itself in a holistic manner and understand that it must construct an effective “business model” to be successful. Everyone that does business with a new firm, from its customers to its partners, does so on a voluntary basis. As a result, a firm must

motivate its customers and partners to play along. The primary elements of a firm’s business model are its core strategy, strategic resources, partnership network, and customer interface. Close attention to each of these elements is essential for a new venture’s success.