Customer Relationships: The Net's New Currency

SAN FRANCISCO (03/08/2000) - This is not a piece about privacy. This is not a piece about regulation. Those issues have been debated at length elsewhere and will continue to be.

This is an article about the economics of customer relationships and some of the tricky questions that businesses and governments face as we move toward an increasingly connected and global network. In the past few months a lot of companies have been burned experimenting with the explosive cocktail that is composed of one part business goal, one part desire for better customer information and two parts technology mishaps.

It's a volatile mix, and privacy incidents have become standard fare in the daily operations of most modern businesses, big or small. If problems haven't hit you yet, don't worry; they're on their way. And you should do everything you can to prepare yourself - strategically, technologically and, most of all, mentally. To put it bluntly, the privacy debate is not about technology and it's not about policy. It's about economics. Companies are increasingly being valued based on their ownership and management of customer information.

Yet the question of who actually owns that information is not at all clear. And until we sort out the issue of whether one person's identity can be another company's property, there will continue to be lawsuits, debates and fiduciary nightmares for CEOs and shareholders. If you're a Net business, you want customer information. That's perfectly normal. But before you go out and get it you need to ask yourself some important questions: Why do you want it? How will it benefit your customers for you to have it? And, most important, what are you going to do with it once you've got it?

Most businesses are not set up to think along those lines. And the bigger a business gets, the harder it becomes for it to manage the competing goals of sales and policy, especially if it's operating in many countries and jurisdictions. For years customer information was either buried deep inside the corporation or kept at the fringes. In the good old days, you had to listen mighty hard to hear the whispers of the data freaks debating the virtues of one-to-one marketing, neural networks, collaborative filtering, lifetime customer value, data warehousing and relationship marketing. Now, with the valuation methodologies commonly applied by Wall Street and Silicon Valley when they look at a new business, all those strategies are in play.

There are already more than 142 million Net users across the globe. They're spending over $50 billion a year at over 11 million dot-coms, which in turn are spending over $4 billion in advertising a year to reach new customers. By 2003 the network will snake through 191 countries, connecting 500 million people with more than 140 million dot-coms producing more than $1.3 trillion in e-commerce and $10.8 billion in Internet advertising annually.

It's now all customers, all the time. Just to compete, every dot-com business must behave like a service business. It must have a call center, customer support, a membership program. Every Web site must offer discounts. Every access provider has to have sweepstakes, rebates, loyalty cards, a sense of community and a free latte. Free is good, free is big, free is the business model of the Internet Economy. But free is not free. In exchange for all their giveaways, businesses want to be fed information. Ask your favorite sell-side analyst or venture capitalist. Ask the legion of companies that offer customer-relationship management solutions.

The answer will be the same: Customer information is serious business. For some companies, it's the only business. And in a market that increasingly judges a company according to the number of registered subscribers it has and the degree to which it knows them - and can profit from that knowledge - handling that customer information is of critical economic importance. But managing customers is difficult. It's also expensive. Look at how much call-center and support-staff personnel have grown as a percentage of many businesses' head count and it's clear the role that human as well as technical-capital allocation is playing in the brave new world of customer-relationship management. That role will only increase as companies shoulder the task of managing data relationships with customers, and the burden of being accountable to them.

We've taken our time getting here. It's been 20 years since the Organization for Economic Cooperation and Development, an international treaty organization supported by all major economies (and a few minor ones), put together a clear set of guidelines for the protection of privacy and the transborder flow of personal data (available online at /priv-en.htm). Finally, with the arrival of 1995 and phase one of TRUSTe, companies began thinking about data relationships with their customers. But there's still a long way to go.

Unlike the Y2K problem, the privacy issue isn't going to go away. Businesses can't just throw money at it. They need to think differently about how they relate to their customers - and to other businesses' customers as well. We all know there's a scramble going on. But it's not just for customers or for lock-in. It's for customer relationships. That's the new currency, and that's why businesses need to think hard about where they want to place their value.

If they put value on the data and not on the relationships, then as trust increasingly goes on trial, they could end up regretting the decision.

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