Bill Schmarzo

Don’t Follow the Money; Follow the Customer!

Disintermediation and Disruption

“Mr. Schmarzo, we’ve noticed that your cholesterol count is at 210, so we have prescribed Fluvastatin and placed selected foods into your shopping basket to help you control your cholesterol. Complete the purchase by selecting ‘here’ and we’ll deliver the medication and groceries to your home today between 4:00 and 4:20pm. If you complete the full Fluvastatin prescription, then we’ll reduce your monthly healthcare insurance payment by 5%.”

This scenario is surprisingly close to reality as mergers cause traditional healthcare industry borders (healthcare provider, healthcare payer, pharmacy) to crumble. A recent BusinessWeek article “CVS Brings One-stop Shopping to Health Care” highlighted the potential benefits of a vertical consolidation of the healthcare ecosystem players:

The [CVS – Aetna] deal would create a behemoth that would try to shift some of Aetna customers’ care away from doctors and hospitals and into thousands of CVS stores. “Think of these stores as a hub of a new way of accessing health-care services across America,” says CVS Chief Executive Officer Larry Merlo. “We’re bringing health care to where people live and work.”

Healthcare value chain vertical integrations could provide substantial benefits to everyday consumers and patients alike, including:

  • An accelerated move to value-based care (focusing on preventive care) and away from the traditional “pay by the service” model (which rewards healthcare participants for more care)
  • A reduction in some of the dysfunctional incentives built into today’s healthcare value chain, such as pharmacy benefit managers (PBMs) profiting from back-end rebates and fees extracted from pharmacy companies

Superior understanding of customers’ behaviors and preferences and product usage patterns form the basis for industry transformations.

New Normal: Business Model Disintermediation and Disruption

Industry after industry is under attack by upstart disruptors and no industry is safe. The basis for their attack is exploiting and monetizing superior customer product preferences and buying habits.The more these disruptors know about their customers – their preferences, behaviors, tendencies, inclinations, interests, passions, associations, affiliations – the better positioned they are to create new sources of value and revenue (see Figure 1).

Established companies are being attacked by companies that are more effective at leveraging big data technologies, new sources of customer, product and operational data, and advanced analytics (machine learning, deep learning, and artificial intelligence) to:

  • Disrupt business models by applying customer, product, operational and market insights to optimize key business and operational processes. Additionally, data-driven insights uncover new sources of revenue such as new products, services, markets, audiences, channels, partners, etc.
  • Disintermediate customer relationships by exploiting detailed customer engagement behaviors and product usage tendencies to provide a more compelling and differentiated user experience.

The following companies are challenging traditional industry business models with superior customer preferences and buying habits:

  • Uber: The world’s largest taxi company owns 0 taxis
  • Airbnb: The largest accommodation provider does not own real estate
  • TripAdvisor: The world’s largest travel company owns 0 inventory
  • Skype, Whatsapp, WeChat: The largest phone companies do not own any telco infrastructure
  • SocietyOne: The fastest growing bank has no actual money
  • eBay: One of the world’s most valuable retailer has no inventory
  • Apple & Google: The largest software vendors write a minimal number of apps
  • Facebook: The most popular media owner does not create content
  • Netflix: The world’s largest movie house does not own any cinemas or create any content (until recently)

Industry transformations will only accelerate because leading companies realize that instead of “following the money,” they should “follow the customers.

Follow the Customer

“Follow the money” is a catchphrase used to understand an organization’s flow of the money and sources of value. Organizations use accounting, auditing, investigative, data and analytic skills to “follow the money” and determine their financial value

However this infatuation with following the money can actually lead organizations astray, and make the vulnerable to disruption and disintermediation from more nimble, more customer-focused organizations. Such organizations operate in industries where:

  • The market is too fragmented for any one organization to provide a complete customer solution and experience.
  • Customer experiences are unsatisfactory.
  • Customer outcomes are questionable, or are downright wrong.
  • “Product Mentality” permeates the Senior Executive team

For example, Amazon is vertically integrating the grocery industry with their recent acquisition of Whole Foods. Where Amazon plans to take the grocery industry (as well as the entire retail industry) starts with their mission statement:

  • Traditional Grocer: “Our goal is to be the first choice for those customers who have the opportunity to shop locally”
  • Amazon: “To be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, at get those items quickly, at the lowest possible prices”

Amazon enhances and simplifies the customer-centric experience with a host of simple, easily accessible user experience choices such as one-click buying, mobile ordering, free and same day delivery, and more.

Optimizing the Customer Experience

80% of customers want a personalized experience from their retailer. Customers don’t want to be treated as numbers on a fact sheet and love it when organizations show a semblance of personalization towards them.

Providing a more holistic, more engaging customer experience starts with understanding each individual customer’s behaviors., tendencies, inclinations, biases, preferences, patterns, interests, passions, associations and affiliations. More than just capturing the customer’s purchase and social media data, leading customer-centric organizations uncover and codify 1) what products and services a customer tends to buy and 2) what products and services customers like them buy.

Amazon is arguably the industry leader in providing a highly personalized customer experience that starts with their recommendation engine (see Figure 2).

Figure 2: Amazon Recommendation Engine

Amazon recently open-sourced their artificial intelligence framework (DSSTNE: Deep Scalable Sparse Tensor Neural Engine) that powers their recommendation engine. Amazon’s product catalog is huge, making their purchase transactions datasets extremely sparse. This creates a significant challenge for traditional neural network frameworks, so Amazon created DSSTNE to generate recommendations that power personalized experiences across the Amazon website and Amazon devices.

Dell EMC Consulting uses Analytic Profiles to capture and codify a customer’s behaviors, tendencies, inclinations, biases, preferences, patterns, interests, passions, associations and affiliations (see Figure 3).

Figure 3: Customer Analytic Profile

See “Analytic Profiles: Key to Data Monetization” for more details on Analytic Profiles.

Organizations can leverage customer insights captured in the Analytic Profiles to optimize key business and operational processes, reduce security and compliance risks, uncover new revenue opportunities, and create a more compelling customer engagement lifecycle (see Figure 4).

Figure 4: Optimizing the Customer Lifecycle

See “Optimizing the Customer Lifecycle With Customer Insights” for more details on leveraging big data and data analytics to optimize your customer’s lifecycle.

Follow the Customer Summary

Leading organizations are realizing that instead of “following the money” that they should be “following their customers” and mining their customers’ buying habits regardless of artificially defined industry boundaries (see Figure 5).

It is these customer insights that will transform the organization’s business models, disintermediate under-served customers, create new sources of revenue, and eventually transform the business into an intelligent enterprise.

By Bill Schmarzo

Bill Schmarzo

CTO, IoT and Analytics at Hitachi Vantara (aka “Dean of Big Data”)

Bill Schmarzo, author of “Big Data: Understanding How Data Powers Big Business” and “Big Data MBA: Driving Business Strategies with Data Science”. He’s written white papers, is an avid blogger and is a frequent speaker on the use of Big Data and data science to power an organization’s key business initiatives. He is a University of San Francisco School of Management (SOM) Executive Fellow where he teaches the “Big Data MBA” course. Bill also just completed a research paper on “Determining The Economic Value of Data”. Onalytica recently ranked Bill as #4 Big Data Influencer worldwide.

Bill has over three decades of experience in data warehousing, BI and analytics. Bill authored the Vision Workshop methodology that links an organization’s strategic business initiatives with their supporting data and analytic requirements. Bill serves on the City of San Jose’s Technology Innovation Board, and on the faculties of The Data Warehouse Institute and Strata.

Previously, Bill was vice president of Analytics at Yahoo where he was responsible for the development of Yahoo’s Advertiser and Website analytics products, including the delivery of “actionable insights” through a holistic user experience. Before that, Bill oversaw the Analytic Applications business unit at Business Objects, including the development, marketing and sales of their industry-defining analytic applications.

Bill holds a Masters Business Administration from University of Iowa and a Bachelor of Science degree in Mathematics, Computer Science and Business Administration from Coe College.

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