Innovation: Achieving Organic Growth

Customer defection. For most executives, few words could be any scarier. The threat that an important customer might take its business elsewhere can set off a frantic and expensive scramble to win it back. And all that effort may be ultimately unprofitable. Instead of simply holding on to customers, it may be much more worthwhile to collaborate with them in ways that create value for all.

Rajkumar Venkatesan, an associate professor at the Darden School, and Ingmar Leliveld, a Batten Fellow and marketing consultant, have been studying customer collaboration in business-to-business settings. Much has been written on the notion of "customer centricity," they note, but a lot of that work does little more than advocate the concept, urging companies to gain a deeper understanding of their customers. Moreover, the focus is often on consumers.

Venkatesan and Leliveld are looking instead at companies that work with their business customers in the shared development of a new offering-a phenomenon known as "cocreation." In their research, they hope to flesh out some of the specific benefits of cocreation and to develop a framework that will give executives the tools to pursue this kind of partnership as part of a growth strategy. "We hope that our work will lower the threshold for working in this way," Leliveld says. "Cocreation is very difficult without the right recipe. We want to reveal the secret sauce."

Their first major output is a teaching case about the unusual partnership between Catalina Marketing, a point-of-sale database company, and Meijer, a grocery chain in the Midwestern United States. Catalina, launched in 1983, provided a powerful value proposition to consumer goods manufacturers. Through machines hooked up to retailers' checkout equipment, Catalina used purchasing histories and loyalty card data to generate coupons during checkout targeted to individual consumers. The Catalina system, backed by a database of information on more than 100 million U.S. households, not only delivered coupons that had redemption rates much higher than those of traditional coupon formats but also provided redemption information much more quickly to manufacturers. In exchange for this valuable service, manufacturers bought access to the system and paid Catalina for each redeemed coupon. Retailers that hosted Catalina equipment received a small amount from each coupon distributed through the system and, it was hoped, enjoyed increased traffic and sales volume.

After Meijer installed Catalina's system, in 1991, the store saw no evidence of such benefits. To the retailer, Catalina was just another supplier, focused on churning out coupons with little regard for the retailer's relationship with consumers. To Catalina, Meijer was just another distribution channel.

When Meijer announced a plan to strengthen its relationship with consumers through a loyalty program in which it would offer its own coupons and promotions, Catalina found itself in a difficult position. Would the company expand its value proposition and help Meijer with this effort? Or would Catalina refuse but try to placate the retailer by increasing the per-coupon payments? Meijer was one of the top five retailers in Catalina's network, so Catalina stood to lose a great deal of revenue if Meijer opted out of the network. But what would Catalina gain by helping Meijer with the new program, beyond maintaining its presence in Meijer stores?

The teaching case ends without a resolution. In reality, Catalina chose to help Meijer develop the loyalty program. In the process, the two companies created a new offering: a customer-tracking system, for which the companies have jointly filed a patent. Through this cocreation effort, Catalina expanded its value proposition to include not just manufacturers but also retailers, and Meijer achieved its goals of developing a successful loyalty program. Moreover, the retailer became one of Catalina's biggest advocates, helping the company market the tracking system to other retailers.

How can you tell if a customer would be a good cocreation partner? This question, Venkatesan and Leliveld say, comes up often in the executive education programs they teach at the Darden School. The researchers plan to develop screening tools that companies can use, as part of their regular customer-review process, to uncover potential collaboration opportunities. They also plan to study other cocreation initiatives in order to learn more about the ingredients for a successful relationship. And they are looking ahead to a large-scale empirical study that will examine how cocreation projects differ across industries and market conditions, and how partners quantify the returns. "In this economy, it's very hard to find profitable growth opportunities," Venkatesan says. "M&A is increasingly difficult, so many companies are open to new, unconventional options, like cocreation. To grow at all, they need to grow organically-that can mean looking at a customer's value chain and finding a way to become a more integral part of it."