Unlocking the Customer Value Chain: How Decoupling Drives Consumer Disruption

by Thales S. Teixeira

In particular, I argue in Unlocking the Customer Value Chain that new technology isn’t driving most disruption today. Consumers are. And that in turn means incumbents require a different kind of innovation in order to thrive—not technological innovation, but a transformation in business models.

You must understand what your customers want, and in particular, the main steps or activities they undertake in order to satisfy their desires. You need to understand their value chain.

These disruptive companies, and many lesser-known firms that we’ll analyze, all deploy innovative technologies, but they use technology to enable their business models. The business models themselves represent the true innovations.

“customer value chain” (CVC) as the series of activities that customers perform in order to fulfill their needs and wants. These activities include searching for, evaluating, purchasing, using, and disposing of products.

more than six in ten smartphone owners used their phones in-store to help in shopping.3 In surveys, shoppers reported that their top three reasons for “showrooming” were better online prices, their desire to see products in person before ordering online, and the unavailability of items at retail stores (e.g., due to stocking shortages).

Best Buy wound up deploying an array of tactics to prevent customers from showrooming and to entice them to buy at the store. It tailored its in-store barcodes to prevent customers from attempting to showroom using mobile apps. It refrained from placing barcodes on some products inside stores and used in-store exclusive barcodes to prevent shoppers from finding lower prices through price-comparison apps on their phones.12 It renovated stores, retrained staff, relaunched its online store, and offered exclusive products only available at Best Buy, such as special editions of Blu-ray movies.13 The company also went on the attack, creating its own shopping app. None of these tactics seemed to deter consumers from showrooming.

Yet disruption in each of these industries ultimately amounted to the same process: decoupling. Upstarts were peeling away a portion of the customer’s value chain that used to be the sole province of incumbent companies.

As of 2019, a sizable portion of Best Buy’s profits came from so-called slotting fees paid by manufacturers for the opportunity to showcase products in the best areas of the store, away from competitors, and with well-marked brand signage.

A key principle of my framework is to do exactly what Best Buy eventually did: find ways to coexist peacefully with decouplers and decoupling, rather than trying to destroy or buy them out. You can kill a startup, but it’s only a matter of time before another disruptive business pops up. Likewise, you can tie customers’ hands so that they can’t move their business to the startups, but it’s only a matter of time before customers figure out how to free themselves from the bonds. To fend off disruption, coexistence is key!

Although my quantitative analysis didn’t include Ryanair, it’s worth noting that the airline became a disruptive powerhouse without possessing unique technologies or product innovations. Its planes and booking systems were comparable to those of other airlines, and its product, the customer experience, was arguably much worse. So how could Ryanair win in a highly competitive market with an inferior product? The company possessed something else that competitors lacked: an innovative business model. Although Ryanair initially made money much like other airlines did, it abandoned the standard approach of selling high-priced tickets to transport passengers and then earning a return after subtracting out costs. Its new business model—virtually unmatched at the time—entailed filling up planes and then acting as a monopoly retailer in the skies.

Guess what percentage of Costco’s total 2016 profits of $2.35 billion owed to the fees it charged its members. Fifty percent? Eighty percent? One hundred percent? Try 112 percent.15 Costco lost money in its traditional supermarket retail business model and more than made up for it with membership fees. Costco stands as an incredible example of business model innovation in the groceries retail sector.

Rather, you see lemonade entrepreneurs who give away lemonade for below-cost prices so they can get long lines of captive customers lingering around their yards, like Costco does. Then these entrepreneurs might entertain customers while they wait and, like Ryanair, sell them “add-ons” like snacks or bathroom privileges. That’s where the real profit now resides. Or lemonade entrepreneurs might engage a band to entertain their customers and require the band to pay them for the chance to promote themselves to their captive audience, like new media companies do. Or entrepreneurs might make money selling their captive customers insurance and warranty contracts that provide for “thirst quenching guaranteed,” like car dealers do. It all sounds outlandish, yet a glance around your industry will show that this is precisely what’s happening.

To get ahead of disruption, we need to pay far more attention to customers than we ordinarily do, and commensurately less attention to competitors. We need to discipline ourselves to look at markets from the customer’s perspective, not just the company’s, and to understand customers’ evolving desires and behaviors.

Customers intuitively or deliberately assess the monetary, time, and effort costs they would accrue when dealing with disruptors or incumbents.

Unless you know all the small, subjective considerations that might influence this customer, your best bet is to perform the comparison in a simple, objective, and systematic manner. How much money, time, and effort must your customer expend to do business with your company? How much must she expend with a disruptor? Does the difference run in your favor or against you?

The three costs I’ve mentioned—money, time, and effort—are not necessarily the only costs to consumers. Another common cost is risk-related costs (e.g., trust, reliability, transparency, and uncertainty).

When in doubt, ask customers what they value most. Learn the costs they care about when making purchase decisions—not just some of the costs, but all of the important ones.

Map the stages of your customer’s CVC to discover where you create value, where you charge for it, and where you sometimes erode it. Then ask yourself three questions: (1) Can you deliver more value in the value-creating activities without charging more? (2) Can you afford to capture less in the value-charging activities, everything else being equal? (3) Can you reduce eroded customer value without diminishing what you’re offering or capturing?

Step 1: Identify a Target Segment and Its CVC

The CVC is the blueprint of digital disruption, and it must be fleshed out so that it is both accurate and comprehensive. Otherwise, your attempt at decoupling likely won’t succeed.

Step 2: Classify the CVC Activities

Step 3: Identify Weak Links Between CVC Activities

Step 4: Break the Weak Links The fourth step is to actually break the weak links and make it worthwhile for customers to decouple their activities from the incumbent.

Step 5: Predict How Incumbents Will Respond Disruptors that decouple activities away from traditional competitors should anticipate how incumbents might respond, and then take preemptive action.

These five steps can be applied to virtually any situation in which you have customers who perform a series of activities in order to acquire a product, service, or idea. As long as a single company currently provides more than one activity to customers, an opportunity exists at least in theory for an entrant to come in and decouple those activities for customers.

Most established businesses often attempt to respond in one of three ways: they imitate the entrant, they buy it out, or they attempt to suffocate it by drastically reducing prices.

By creating value for the consumer (reducing the costs of calls and messaging) and charging for value elsewhere (connectivity), telecom operators like Telefonica rebalanced their business models, a move that in turn allowed them to coexist profitably with consumers’ new behaviors and the industry’s savvy decouplers.

Each of these disruptors spotted a section in the value delivery pipeline where value was created but only charged for at some later point in the process. Leaving money on the table is what feeds these opportunistic decouplers. The only way to coexist with them, without expending huge resources to squash each and every one as they appear, is to minimize their incentives. Rebalancing achieves this, allowing you to capture value at every point in the CVC where you create it.

Generally, rebalancing is the most sustainable approach, as it tends to eliminate the outstanding incentives for decouplers, whereas recoupling merely defends against the decoupler’s current plan of entry without negating those incentives.

If decoupling poses an imminent threat to your business, don’t turn to recoupling as a permanent solution. Instead, devise both a short-term recoupling plan and a plan for preemptive decoupling. If you choose to proceed with recoupling, treat it as a way of buying more time so that you can conceptualize and experiment with a new and rebalanced business model.

Changes in your customers’ consideration sets are the first telltale signs of impending disruption to your market, and possibly to your business as well.

Here consumers are the decouplers. They determine whether to ask themselves “Should I even be purchasing a product in that category?” The decision to pose that question is largely outside management’s purview.

Research has also revealed that consumers who are more price sensitive tend to be less effort sensitive.

Such differences create what academics call “self-selection mechanisms” in the market. Some consumers will prefer the cheaper option, as they are highly price sensitive, while others, being less sensitive to price but highly sensitive to effort, will prefer the more expensive option. The bottom line is that executives should incorporate customer sensitivity to different costs into any cost comparison analysis of incumbent companies and disruptors.

Putting all of these steps together help you to decide whether and how to respond to decoupling (see Figure 6.5): 1. Calculate the market share at risk due to decoupling (i.e., all similar decouplers). 2. If the risk is high, calculate the cost of responding and weigh it against the risk. This calculation will allow you to decide whether to respond to decoupling or not. 3. If you decide to respond, decide whether to recouple or decouple. 4. If decoupling, decide whether to change the business model by rebalancing or not.

You need to define your competition as your customers see it, not on the basis of how physically similar your products might appear on the surface.

Most potential decouplers fail either because they didn’t acquire enough customers or because they couldn’t profitably serve those customers who had signed on.

As the first business in a fast-growing market, mass offerings eventually attract competitors. Those considering entering the original incumbent market could do so by building another mass offering to compete with them. But that would be foolish, as customers would not clearly distinguish the new offering from the established one. So instead, new entrants usually specialize. That is, they choose one or a couple of dimensions that they know customers might value more, and they create so-called niche offerings that are appreciably stronger in those dimensions. That allows new entrants to quickly win new customers—for instance, those that value low prices, high quality, or convenience more than they value assortment or customization.

By entering at the extremes of an important dimension for the customer, and by also featuring an offering strong in a secondary dimension (e.g., low price, effort, or time), these fashion disruptors appeal to a small group of shoppers who care deeply about that dimension. In fact, these shoppers care so much about the dimension that they’ll quickly switch from one of the established players to a startup. After these startups have secured a position as the extreme provider in a certain dimension, they move on to conquer adjacent dimensions.

Analyzing Airbnb’s story, we can discern the following seven principles at work:

Incubate your early customers (and start with the suppliers). A startup’s initial customers help it enormously, and their relationship with the company is extremely fragile. One slip, and customers vanish. If they stay, as happened with Uber, Airbnb, and Etsy, they will help you attract more users, creating a powerful and indirect network effect as an engine for growth. If you are launching a two-sided marketplace, focus on acquiring supply-side customers before going after the demand side.

Use low-tech, offline tools. Tech startups tend to dismiss offline customer acquisition tools, such as organizing events, creating on-the-ground operations, or incentivizing users to talk to acquaintances about their services. Yet Airbnb’s deployment of such tools fueled its early growth. Only over time, as the company’s growth rate stabilized, did it switch to online customer acquisition channels.

Online marketplaces must match supply and demand. Early on, you cannot expect technology alone to accomplish this difficult task. Uber went door-to-door to get its first drivers to sign up. Airbnb did the same for its renters, and when it convinced people to list their homes, its employees went out of their way to find a person to rent each home.7 A platform manager must take the hand of a buyer and find a supplier so that a transaction can occur. Otherwise, buyers and suppliers might not match up, and they will never return to the platform.

Analyzing this CVC, we spot a clear pattern: in principle, customers could perform each of the relevant activities with one of Alibaba’s multiple companies (see Figure 8.2). Meizu produced the phone, and Aliyun the operating system. Customers embarking on their purchasing journey could begin using a content site such as Yahoo China, owned by Alibaba, and move into the eTao search engine. Customers could then choose one of Alibaba’s online stores—Alibaba itself, Taobao, or Tmall—and communicate with the seller via Aliwangwang. Finally, consumers could pay with Alipay and receive their goods via a Cainiao partner.

Alibaba didn’t immediately pursue firm-side synergies. Its real win lay in achieving customer-side synergies.

The beauty of leveraging customer-side synergies is that it reduces pressure on companies to try to find new customers for their new offerings. All they have to do is offer them to current customers—a significantly cheaper task to accomplish.

In evaluating where to grow next, think methodically about each activity in the customer’s value chain. Map out the CVC activities as seen by the customer. Then switch the focus back to you, determining the skills you would require in order to bring to market an offering that helps customers perform each activity. Compare these skills with those your company currently possesses. If the skills match up well, then you might viably couple that activity. Otherwise, you’ll need to fill in skill gaps by building skills internally, borrowing from others via a partnership of some sort, or buying them by acquiring people or businesses.

One corollary of decoupling theory is that companies will tend to stall not when they stop innovating per se but when they abandon the laser focus on the customer needs that fueled their early growth to begin with.

Because they lack significant resources to attract customers, disruptors approach their business with a different mindset. Uber didn’t have cars. Airbnb didn’t have hotel rooms. Netflix didn’t have stores. For disruptors, revenue growth originates in one place, and one place only: customer acquisition. If such acquisition requires an asset, then the disruptor might want to build, acquire, or borrow that asset from others. But disruptors don’t regard the asset as the end game.

Netflix’s decision reflects a deep and abiding customer-centricity on the part of Hastings and other company executives. A traditional incumbent would have focused on its most valuable resources, an inventory of millions of DVDs and multiple shipping and handling facilities around the country. But for a company streaming content online, those assets didn’t matter. In fact, they were worthless. The new resource would have to include powerful servers, broadband bandwidth, and licensing agreements with Hollywood studios. The almost total divergence in strategic resources required for the two business models would have impeded the transition, if not for Hastings’s prescience and deep customer focus. To execute this courageous business model transformation, he began to use internet service providers’ most valuable strategic resources: broadband bandwidth.