There’s a growing emphasis on customer focus these days. Approximately 30% of Fortune 500 companies use a customer-centric organizational structure (i.e., business units organized around specific customer segments) rather than a product-centric one. But is there a danger in being too customer-centric?
A recent Harvard Business Review article by Professor Lee and colleagues details the surprising costs of being a customer-centric company.
The benefits of being customer-centric
Lee and colleagues’ research on 137 Fortune 500 firms finds that customer-centricity results in:
- greater knowledge of customer groups (e.g., uncover unmet needs)
- higher customer satisfaction
The costs of being customer-centric
This research also found that customer-centricity results in:
- increased organizational barriers to sharing and communicating
- higher complexity-related costs and losses of economies of scale
- higher marketing and coordinating (i.e., managing interdependent activities across internal units, suppliers, and customers) costs
Is being customer-centric profitable?
An analysis of 37 Fortune 500 firms that restructured into a customer-centric approach found that their financial performance dropped by 39% on average from their pre-restructuring levels due to coordinating costs resulting from internal conflicts and confusion. After 10 quarters, however, their financial performance exceeded pre-restructuring levels by 11% on average due to higher customer satisfaction.
So the benefits of customer-centricity only starts to counteract the costs after three years.
These results are consistent with research that found that having a customer focus was not correlated with immediate sales performance but it was related to greater sales increases over time (i.e., growth) compared to salespeople with more of a transactional focus.
When being customer-centric pays off
Lee and colleagues found three conditions under which customer-centricity pays off:
- Few customer-centric competitors: When your competitors already have customer-centric structures, any one company’s customer-centric structure becomes less valuable. Customer-centric companies with many customer-centric competitors had 11% lower performance than their product-centric peers.
- Less competitive market: Customer-centric firms that operated in highly competitive markets had 69% lower performance than their product-centric peers.
- High industry profitability: When only a few customers value greater responsiveness, restructuring around customer groups isn’t worth the costs. Customer-centric firms in less-profitable industries had 20% lower performance than their product-centric peers.
The value of being customer-centric sounds appealing intuitively but a look at the data shows that in many cases, the monetary costs outweigh any potential benefits. Understanding your market is key to deciding whether having a customer-centric structure is right for your company. And even with optimal market conditions, you’ll be waiting a while (about three years) before the investment pays off. For some companies, that’s time they just can’t afford to lose.
So figuring out how to meet your customers’ needs better than your competitors is always a good thing, but being customer-centric isn’t always the best way to do it.
Have you adopted a customer-centric structure on your company? Let me know in the comments or tweet @recruit_smarter.
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