Online CustomizationCraig Dixon T’05MBA Fellows Project

Online CustomizationMBA Fellow Craig Dixon4 May 2005


Online customization mass customization via theinternetOnlineOnline CustomizationCustomizationCompany’sCompany’s PerspectivePerspective Online customizationallows manufacturers toforgo bills of materials andmass production andproduce only what theircustomer wants,eliminating finished goodsinventories in the process.Consumer’sConsumer’s PerspectivePerspective Online customizationprovides superiorcustomer value byproducing goods anddelivering services thatmeet individualcustomer needs withnear mass productionefficiency.3

Online customization sounds good why didn’t itwork?“The promise of online customization has been a near-complete bust. Many people don't really wantit and companies have a hard time doing it.”- Wharton Professor Peter S. Fader, 2002 I posit technology and customers’ shopping behaviors were the main two issuesimpeding the advancement of online customization.Customers’Customers’ logy IIssssuueess Browser war between IE andNetscapeLack of 3rd party browserapplications to provide“enhance” experience toconsumersLimited ability to “try andbuild” product beforepurchase Small percentage of UShouseholds shopping onlineShoppers are not trusting ofonline shopping systemsShoppers are not satisfiedwith their online shoppingexperienceThe evolution of information technology makes online customization a reality.4

Since technology is not longer a hurdle, we shouldstudy online customization because customers want itand companies can reap many benefits“Forty-seven percent of online consumers want to buy custom products online.”- Forrester Research, 2002We should care about Online Customization because:1.Initial technological hurdles are cleared2.Customers want it3.Companies can reap many benefits5

Customers want online customization and are willingpay for it“It is the customer who determines what a business is.”- Peter F. DrunckerGadget guys Gadget guys account for 61% of the 16% ofonline consumers who are interested in buyingcustomized consumer electronics online.Fashion-forward females Account for at least 10% of online consumers. Want to customize products ranging fromapparel to jewelry to footwear online. Spend at least 25% more than the avg. onlinehousehold in each category they are interestedin customizing online. Younger, wealthier, and more likely to buyonline than the average online consumer.Children When asked, “Would you like to be able topurchase your own custom model in the LEGOFactory gallery?” 47% responded “Yes theywould love to buy it!” and 39% responded,“Maybe, it depends on the price.”Source: Christopher M. Kelley, “Do Your Shoppers Want Custom Products?”. Forrester Research. May 21, 2003.6

Many companies have realized tremendous value fromonline customization. The benefits include “All people want to be unique. We receive a 200% markup for our customized sneakers.”- Blak, CEO Increase average unit selling price by 50%. Eliminate finished goods inventory risk, while ensuring availability.“Making each product one at a time could greatly reduce returns,overstocks and the costs associated with warehousing finished goods.”- Ron James, Lands’ End Internet project manager7

Many companies have realized tremendous value fromonline customization. The benefits include Capture more of the demand curve. Enable sophisticated data mining that will allow transition from massmarketing to relationship marketing.By knowing what your customers want, you can provide specific products to filltheir needs. “You're able to really satisfy customers in a new way. They thinkthey are getting something that is completely unique, even if it really is not.That is a huge customer- retention tool.” - Jim Williamson, senior researchanalyst at IDC8

Since 1999, many companies have joined NikeiD bysuccessfully providing customized products NikeiD was formed in 1999 and is one of Nike’s fastest growing business units.Custom chinos accounted for 40% of Lands’ End’s overall chino category within thefirst year of launch.This success has prompted other such as Target, JC Penney, Gap, L.L. Bean, andVans to begin offering custom products in 2004.9

It makes sense to customize when The consumer cannot assemble the desired productfrom current offerings.There are many different permutations for a product. Itwill be impossible for a company to offer all of them in aretail setting.Your consumers want choices. Customizing products willput more demand on the consumer to take part ofprocess.Company culture will allow it. If designers want theirproducts to go on the market untouched thencustomization may not be a good cultural fit.An operations strategy can be developed. Base thedecision to outsource customization capabilities ordevelop proprietary systems on your companies’ corecompetencies.10

The key components of a customization strategy When thinking about the key components of an online customizationstrategy, consider your current capabilities, external factors, and how willonline customization help or hurt the company’s bottom line.Source: Adapted from “Success Factors for Mass Customization: A Conceptual Model.” Journal of Market-Focused Management, 5, 309– 330, 2002.11

While there is great promise for online customization,there are still a few inefficiencies with the conceptItem sourcing capabilities By implementing a online customization system, you will have to deal withthe unpredictability of the order flow. When you introduce smaller volumesto the sourcing companies, they may be less interested to work with andmay charge a higher rate.Wages vs. logistics tradeoff Due to the prohibitive costs of domestic labor, companies tend to work withinternational low cost providers. While this may offer wage benefits, it cancreate increase in logistic costs and order time.12

Case Study - Not all products may begood candidates for customization“It was clear to us that the activity was extremely compelling but the item wasn’t,”- Christina DeRosa, VP Mattel responsible for the In 1999, launch the My Design feature on Design allowed visitors pick the hair color and othercharacteristics of dolls.Only 0.2 percent of the visitors who used the feature then boughtdolls.Reasons for lack of purchase:Most of the users were too young to have credit cardsMattel already offers hundreds of doll variations in stores, often at halfthe 40 price of a customized modelThe cost could not be reduced because each customized doll was madeby hand Currently visitors can still mix and match hairstyles, clothing, andeye color, but just for fun.13

Case Study - Pacesetter who madegradual progress with online customization“NikeiD brings us back to our roots, when we designed and sold shoes one-by-oneout of the trunk of my old Plymouth”- Phil Knight, CEO Nike Started in 1999, Nike took the concept of selling its sneakers online to the next levelthrough its NikeiD program.NikeId allowed customers to design and order sneakers online by using onlinecustomization software.The software takes consumers through a systematic process where they can choosethe size and width of the shoes, pick the colors, and put their own 8- characterpersonal ID on the product. Consumers can also view a model before purchasing theshoe.Limited initial orders to 400 a day due to factory constraints. This limit was reachedseveral times during the first month .Early reviews, were full of complaints due to the limited selection and availability. Soless than a year after its debut, Nike added additional shoe models and morecustomization options while increasing site capacity.Since the time of NikeiD’s inception, Nike has incorporated apparel and accessoriesinto NikeiD.14

Case Study - Using data to understandcustomer needs, a company partly owned by Procter & Gamble, wasintroduced in January 2000.More than a million products have been customized through the site.Shoppers can order beauty products — including mascara,shampoo, and fragrances — blended to meet specific tastes basedon answers to questions about traits and preferences.By creating their own cosmetics, shoppers are formulatingdermatological needs, evaluating new scents, bundling products,choosing packages, and developing new products for P&G.For P&G, is reported to be one of the most efficientmarket research tools and the data gathered has to gain a better understanding of the needs of theircustomers.15

Special Thanks! Professor Joe HallProfessor Georgios BakamitsosDavid Gross, T’99 (NuSewco - CFO)Hans C. BrechbuhlProfessor Alva TaylorProfessor Eric JohnsonTuck School of Business Center for DigitalStrategies16

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- Wharton Professor Peter S. Fader, 2002 TechnologyTechnology Customers' Shopping Behaviors Customers' Shopping Behaviors I s s u e s I s s u e s Browser war between IE and Netscape Lack of 3rd party browser applications to provide "enhance" experience to consumers Limited ability to "try and build" product before purchase Small .