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Commentary: Considering Web-based customization

Offering customized and profitable products to consumers has been a dream of manufacturers long before the dawn of the Internet.

Offering customized--and profitable--products to consumers has been a dream of manufacturers since long before the dawn of the Internet.

Many companies--stockbrokers,

See news story:
Coming to the Web: The new face of Wheaties
PC makers, auto manufacturers, clothing brands, and now even General Mills--have tried and will continue to try mass customization strategies over the Web with varying degrees of success.

Successful Web businesses typically offer products with a high information-to-mass ratio. Stock trades are all information and have been very successful on the Internet since the beginning; stock trading also encompasses some of the most advanced examples of wireless access. Custom PCs have a high information-to-mass ratio, and so PC makers also have been successful. On the other hand, cereal and other consumer products have a very low information-to-mass ratio, making the business value proposition and payback more challenging.

Another key to success lies in how a Web customization strategy will affect the product's normal sales and distribution channels. Early experiments with blue jeans did not fair well, for instance, in part because of quarrels between the manufacturers and their retail channels. The result was a net loss of sales and market share, rather than a gain.

The critical role of logistics
The information-to-mass ratio points out the critical role that logistics plays in Web-based business. In fact, another reason why some consumer product pioneers failed in their Web-based customization efforts was that they were not prepared to fulfill the orders they received. Most manufacturers have distribution systems designed to ship large amounts of product to hundreds or thousands of points.

Fulfilling custom orders, however, requires that very small quantities of product be shipped to hundreds of thousands of individual customers. Many retailers--notably Amazon.com--have problems doing this successfully. Distribution to consumers also requires manufacturers to handle the inevitable returns efficiently, which is another major challenge in Web retail.

Shipping directly and cutting out the retail channel are not the only available strategies, however. For instance, General Mills could offer its custom cereal in conjunction with food retailers--you order the cereal online and pick it up and pay for it at your nearest supermarket a week later.

Of course, the manufacturing side of a company must also be designed to provide mass customization of products. In General Mills' case, producing the custom box will be a lesser issue than distribution, but still a challenge. Once the box is printed, mixing the cereals is easy, because the manufacturing process has been geared for this for some time.

Success also depends on the company's goals. At $7 a box, plus shipping, custom cereals are priced at a significant premium over the retail cost of cereal in the store, and thus unlikely to appeal to a mass market. It may appeal to people with money and the desire to have a custom product, and it may appeal to hotels and bed-and-breakfasts that can design their own granola mix and have it custom-labeled. This might be the market that General Mills is after.

Companies pursuing Web sales of goods with low information-to-mass ratios must focus attention on increasing the information side of the equation. Customizing combinations of standard cereals is just one example of this. More generally, companies can use CRM (customer relationship management) and integrated CCM (commerce chain management) business systems to drive up an offering's informational value. Many firms also use aftermarket Web-based services to enhance this ratio.

Patterns of preference
Companies are also using personalization to discover patterns of product preference. Providing customers the opportunity to "configure" specialty cereals may yield tremendous insight into tastes, which companies could respond to through mass marketing.

Say that a lot of people ask for banana granola cereal--this could become another branded product for General Mills. Web sites, therefore, can allow companies to do test marketing and to collect data on what consumers are really looking for, which is something that these companies have been trying to do better for years. In addition, acquiring customer data directly is a first step for any company considering a brand extension effort (e.g., Wheaties apparel).

Enabling Web-based customization of products and services is a powerful marketing idea that has succeeded in some industries. We will see continued experimentation and new successes--and failures--over the next few years.

Companies considering a Web-customized product or service strategy first need to look at the information-to-mass ratio of their products. They need to examine how direct sales over the Internet will affect their existing retail channels. Then they need to define their real goals based on that analysis. Is the company really trying to open a new profit center, or is it trying to gain market intelligence? They must also take a close look at whether their existing operations can support order fulfillment quickly and profitably.

Only when all of those pieces are in line should companies strike out on a Web customization adventure. And they should remember that designing the Web site is the least and last of the challenges they face, not the instant gateway to success.

Meta Group analysts Peter Burris, Dale Kutnick, Val Sribar, William Zachmann, Gene Alvarez and Jack Gold contributed to this report.

Visit Metagroup.com for more analysis of key IT and e-business issues.

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