The Customization Economy: Myth or Reality?

What do M&Ms, iPods, BMWs, and New York’s online grocer FreshDirect have in common? They all push the envelope in the customization economy. Since its popular inception, e-commerce has promised customization of a wide variety of products and services. But the reality is products-for-one have been slow to materialize. Or have they? Customization is happening in unexpected places and changing customer expectations across the board.

If you’re buying a new Dell laptop or BMW sedan, you can configure your own computer or car on the Web. These are highly publicized and somewhat predictable examples of customization, and they’re far from the only ones.

The Long Tail,” a recent Wired article, describes “many of our assumptions about popular taste [as] artifacts of poor supply-and-demand matching — a market response to inefficient distribution.” Much of modern product development and marketing has been predicated on a reliance on hits and large-scale production and distribution. The author claims we all may not want to listen to the same top 100 music hits or watch the same Hollywood blockbusters. There just haven’t been other options. The economics of choice are too inefficient when choice means every person can design and build exactly what he wants.

Wired writes that of 6,000 submissions to the Sundance Film Festival, only 255 were selected. Of those, only two dozen films were picked up for distribution. The economics of attracting enough people to a local movie theater or video rental store to justify the release and associated marketing of a new film stack the odds virtually impossibly against independent filmmakers. Even a video rental retailer can’t keep a DVD on the shelf if it only rents once every 12 months.

This problem is based in the costs of marketing, inventory, and reach. The economics of choice can give us 39,000 songs in a typical Wal-Mart or 3,000 DVDs at a Blockbuster. But that’s only a small fraction of all available songs (over 700,000 in Real Networks’ Rhapsody) and movies (25,000 at NetFlix). Forget about marketing anything that’s not a new release. Broadcasting (i.e., mass marketing) to reach an audience of hundreds or a few thousand individuals just can’t be profitable.

Mass-market economics and logistics make a hits-driven approach the only way many companies can create new products. Unless a new consumer product has potential to appeal to the masses, it’s more often than not impossible to economically justify development. Highly customized versions of products won’t work unless a buyer is willing to pay a huge premium.

The article describes the long tail as all the products traditional retailers can’t keep on their shelves because no store can reach enough customers to justify the cost of stocking obscure, low-demand items. Yet things that are obscure to me may be coveted by you. eBay demonstrated obscure items can find enthusiastic buyers when inventory and communication constraints are removed.

This is the customization economy. In the customization economy you get what you want, suited to your personal taste and needs. You design your own products or experiences, and you’re in control of when and where you get them. You don’t rely on mass marketing to decide what to buy. Instead, you decide based on what other people recommend or what a computer suggests you may like based on what you and others like you already bought. You expect companies you do business with to use their knowledge about you to treat you as an individual, not as a segment or target; to make recommendations, not push the latest hit; and to always offer choice, choice, and more choice.

Do you consider iPods and TiVos part of the customization economy? They are. With TiVo, you make your own TV channel, watching only programs you choose when you want to view them. The main attraction of the iPod is you listen to only the music you want when and where you want. TiVos and iPods let customers design and choose their own experiences.

Did you know you can buy M&Ms online and create your own custom blends? It’s even possible to have a personal message printed on each and every candy. It surely won’t be long before you can design your own packaging and print your five year old’s picture on a batch of M&Ms for her birthday (only on the yellow ones of course, her favorite color).

I recently had breakfast with Steve Michaelson, president of FreshDirect. He gave me a tour of FreshDirect’s warehouse in Queens, a fascinating experience. When you order from FreshDirect, say some organic heirloom tomatoes and lamb chops, the produce is hand-picked for you and the chops are cut exactly to order by a FreshDirect butcher. Everything’s nicely wrapped and labeled with your name on it. FreshDirect has done what Webvan never managed to achieve before leaving one of the most spectacular craters of the dot-com era: It’s reached cash-flow breakeven.

It did so by listening to customers and expanding one Zip Code at a time, while carefully debugging the complex operations involved in delivering high-quality groceries to doorsteps in New York, Brooklyn, and Queens. Now that it’s proven it can reach scale and operate the business without losing money, things will get really exciting.

I imagine it won’t be long before you can select a recipe that fits your diet and get all the ingredients for the meal delivered to your home. If you’re on a diet, you may be able to shop within its constraints. Or for the one day a year when you’re allowed to cheat on the diet, how about a custom birthday cake?

The customization economy’s promise has been elusive. Perhaps we’ve looked for its arrival in the wrong places. If you don’t give customers choice and products-for-one, you’ll increasingly become irrelevant. Mass marketing and limited inventory or “stock items” are antithetical to the digital, customization economy.

The customization economy train is running down the tracks. Are you on it?

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