Mobile Marketing and Value Decoupling: Interview with Harvard professor about eight years of research into business disruption

by Daniel Burstein, Senior Director, Content & Marketing, MarketingSherpa and MECLABS Institute

When you’re looking to increase mobile conversion rates, you need to focus on the customer. This is equally true for something as small as the copy on your call-to-action button and as big as your company’s entire business model.

Harvard Business School Professor Thales Teixeira conducted eight years of research working with 44 companies — in pairings of digital disrupters and the disrupted companies — to discover the secrets behind the world’s hottest startups and how they are earning market share from the biggest Fortune 500 companies at an unprecedentedly rapid pace.

He shared the discoveries from his research in the book Unlocking the Customer Value Chain: How Decoupling Drives Consumer Disruption … as well as in a recent interview with me, which you can read below. 

Spoiler alert: mobile marketing plays a huge role.

But not just mobile really, it comes down to understanding the customers — how mobile has changed their behavior and how the platform can be harnessed to serve them in the way they want, not the way company’s thrust upon them.

Here, I’ll let Teixeira explain …

(this interview has been lightly edited for clarity and brevity)

That is what we call digital disruption

MarketingSherpa: In the beginning of the book you talk about Mickey Drexler, CEO of J.Crew, a company that was unable to keep up with the pace of digital change. Drexler said, “If I could go back 10 years, I might have done things earlier.” This quote is in some ways the spur for your entire book. For mobile marketers, what are some things that should tip them off that change is necessary?

Thales S. Teixeira: Particularly when we talk about disruption, when I looked into many industries and in my book I look at 22 industries in different countries, first of all, I realized digital disruption, one thing it's doing is causing big established companies — what we call incumbents, the leaders in many different markets — to lose a significant amount of market share in a very short period of time.

So, whereas in the past if you would see Coca-Cola battling Pepsi, Coca-Cola would come up with a new drink, it would get one or two percentage-points market share away from Pepsi. Pepsi would respond, retaliate, and then maybe get half a percentage point or one percentage point back. The same dynamics happened with Boeing and Airbus, with IBM and Apple. It happened with Mercedes and Audi.

But what we’re noticing now is something very different. A very different game is happening in which startups, mostly digital startups and many of them using mobile apps, are taking large chunks — 10, 20, 30, 40 percentage points away from these industry incumbents.

So if you take a case like Gillette, the market leader with 60 to 70% market share in the men’s razor industry, and suddenly, a startup out of nowhere called Dollar Shave Club, in a matter of five years, takes a leading position in sales of online razors using mobile apps particularly.

That is what we call digital disruption.

It happens quickly in less than a decade, and it happens with a significant amount of market share lost and switching hands from incumbents to startups.

Disruption comes from better understanding customer behavior, not from technology itself

MarketingSherpa: So what do you think it is about mobile specifically that has made this happen so quickly? I mean, there have been other technological changes throughout the past hundred years, throughout history. Is there something specific about mobile that has made this especially disruptive?

Teixeira: There is, actually. When I looked into why these industries were being disrupted, I would go to many large companies and ask them, “What do you think is disrupting your business?” And most executives would either say technology X is disrupting my business, they would point out the technology. And another group of executives would say, “Oh this tech company, Facebook, Google, Netflix, Airbnb, is disrupting my business.”

But once I went and visited these startups, and I asked them, “How are you planning to disrupt markets?” they would look at consumer behavior changes, and they would be very quick to respond to those changes, not really mentioning much of technology.

So for example, when you look at Uber in the beginning, they didn't have a major technology when it started out. Whereas now, we're used to you getting your phone and pressing a button, and the car automatically comes. In the past, what would happen is, if the consumer tried to order an Uber, they would have to send a text message or actually call Uber. And then somebody — a dispatcher, a physical person at Uber’s headquarters — would try to call up every black car company and try to get a ride booked for that person.

It was not automatic, it was not on demand. Was the mobile app being used? Yes, but it was off-the-shelf technology. What really changed was people arriving at airports late at night … instead of getting a cab, they would order an Uber, right?

That was a behavior change that was a consumer-led change that caused that.

And so when we look at the technologies, what mobile allowed is shifting the preferences from a delivery and from a specific point in time to basically being continuous, right?

Before the mobile phone, we would define what time of day, what day of the week we would go grocery shopping. We would buy durable goods.

Now, we buy it when we feel the need in our brain.

So whenever I say, “Oh, I need to buy this,” I go and I get my phone, and I make that purchase. So purchases have become more continuously spread over the course of the day and over the course of the week due to the mobile phone.

As comparison, before, they clustered around Saturday morning as a time for grocery shopping; Sunday afternoon is time for clothing shopping, things like that.

Now it's basically continuous. And the mobile phone enabled that. But it was really the change in consumer behavior of doing continuous shopping that enabled these changes.

The big conclusion is it's not technology.

It's not a startup or a tech company.

It is consumers who are disrupting businesses in the way that consumers are changing their needs and wants and, as a consequence, changing their behaviors. That is what’s causing the downfall of big established companies. A significant amount of market share could be lost in a short period of time.

MarketingSherpa: So you conducted a pairwise analysis of 44 companies across 22 industries. Can you give me an example of where mobile specifically played a key role?

Teixeira: I think of Trōv, this online, app-enabled insurance. This is just phenomenal.

Trōv is a mobile-first insurance provider basically. Imagine that you have to go to my country, Brazil, and you just bought a $1,800 Nikon camera.

You're going to go up the favelas, you're going to visit poor places, you know. You're afraid that you might lose your camera, or it gets stolen.

And so you sign up with Trōv. And once you sign up, you give Trōv access to your inbox and your Amazon account. And basically, it pulls in all of your major purchases.

So the camera, the TV, all the things that you own in your home that is of value to you, it knows where you bought it, and it knows the price of those things. And so now as I'm preparing to embark on the plane to Rio De Janeiro, I can turn on the insurance just for that camera by just swiping to the right with my finger. And after that, what Trōv does, it insures that camera for me, and it charges per day about $1.50 per day for that camera.

So I go a week into Brazil, and when I come back and I feel I don't need the insurance anymore because my risk has been dramatically reduced by coming back to the US, I just swipe to the left, and lo and behold, my insurance stops working.

So it's app-enabled insurance, on-demand, and this is a very, very convenient way to insure specific items for some period of time.

What was the alternative? If you had to do that with the standard insurance companies — GEICO, Liberty Mutual, Allstate — you would have to get an insurance policy, you would call up an agent, talk to them about your needs, they would write up the contract, you would look over it, you would have to provide the list of your possessions or estimates about cost which you would submit to them, they would accept you, they would send you the premium you have to pay. And then all of that just [to later] cancel the insurance — is very complicated.

You would probably never do it for a camera for a week. You would just say, you know, “To heck with it. I'm going to take the risk with Trōv now.” You can do it on demand very, very conveniently, and this is a key example of what I call decoupling the value chain.

Why is it decoupling?

Because Trōv doesn't replicate the whole insurance industry.

It doesn't do all the underwriting, the risk assessment, all these things that big insurance companies do. It just sells you the insurance, and it turns on and off – insurance on-demand. But in the background what it's actually doing is basically it's hiring other insurance companies in aggregate to take care of all of these insurance risks.

The mobile technology is trivial, the business model innovation is profound

MarketingSherpa: Let me dive a little deeper into this with you. As you mentioned, the big thing that changed was the customer behavior, not the technology. But without mobile technology, without mobile marketing to make that happen, that would not be possible. Isn’t mobile marketing and mobile technology a key driver for a company like Trōv?

Teixeira: Sure absolutely … but it's all, by now, standard, off-the-shelf technologies that are available to both the startups and the incumbents, and so that is not the differentiating thing. It's not any of these disruptors that are trying to find an innovative, new technology that will allow them to win in the market.

Everybody now has access to apps, to simple reviews, to websites, all of these things. That is not the differentiator anymore. That's the point. It's just table stakes.

They've [disruptive companies] been so much quicker and nimbler to understand how mobile is changing a customer behavior — and taking advantage of it. Not that they've invented anything that’s new in those regards. That's what we call a business model innovation.

When you say a different way to take advantage of the technology, Trōv decided to create insurance on-demand. That is a business model innovation. All the technology behind it is trivial, well-known and well available to anybody, to you and me. But Trōv was the first one to say, “You know what, I'm going to use these capabilities to allow people to summon insurance for specific items that they own instead of having to buy it all.” By “all” I mean insuring all my house, all my possession one year, and I do that by going to a physical location to get the insurance.

So, in that sense, it's a business model innovation. Many of the startups that I've seen … is that they really benefit from the changing customer needs and wants by thinking of innovations in the business model. That is the key element.

The freemium model — decoupling paying from using

MarketingSherpa: Let’s talk about mobile gamers and the way they disrupted their industry. They disrupted by changing the way customers pay. Instead of paying 60 bucks at the “front door” before even trying a game, they charge when people are already inside and experience the value. They build an audience with a freemium model where 98% of people never pay, and only 2%, the most loyal players, pay. I think this is another example of a business model change, not a technology change. Because the freemium model, at the end of the day, that is marketing. That’s a pricing model change.

Teixeira: Yes. I agree with that. So freemium is a business model innovation that could only occur in the internet. Before that, it did not exist.

You could have a company that gives you free samples, but never ever before have we seen a company give you the same product for free for eternity for you to use. That did not exist. Only with the internet was freemium suddenly possible in many categories of products. You don't need to pay us anything for the rest of your life if you use the simpler version of the product.

And via mobile, that took it even to another level by using that for the gaming industry. And today, the lion's share of revenue in gaming comes from premium models, which essentially is the ability to play games for free on the phone.

I think there are many lessons from that.

So first of all, many companies should consider thinking of — is there a free version of our products or services that we can offer on mobile to create a long-lasting relationship? Because what today companies think of is they want a customer, but they want a paying-using customer. And what freemium does is it decouples paying from using. Let's get a customer, a non-paying customer, and then they have a relationship with us. They learn what they like, and over time, they become a paying customer.

So it's kind of a two-step process. But for most of the standard companies, there's no two-step process. You're either a paying-using customer, or you're not paying and not using.

What the mobile revolution in gaming allowed, it decoupled these two activities by having two steps instead of one as a way to eventually get … a paying customer.

In mobile, two percent of the customers pay for all of the other ones. So it allows for this heterogeneity and willingness to pay to take shape. And that is pretty impressive, what has happened in that industry.

Consumers add value even when they don’t pay for a product

MarketingSherpa: A specific freemium example is Supercell with its game “The Clash of Clans.” It was free, but the way they charged money was with in-app purchases. We take that for granted now, but they found a whole different way to charge for a product, by having some people pay with cash but the others pay with attention to create social gaming.

Teixeira: That's right. The underlying element with that is their realization that most people are not willing to pay, but they add value to the system. In Fortnite, it's a game that most people don't pay, but if you didn't have all those people, it wouldn't be this popular because it's a social live game.

So you have millions of people in Fortnite right now, and if you had only the paying ones, then you would have maybe just a few thousand. It's not that interesting, not that fun. And so there's a way to add value to a product from the consumer standpoint without just paying for it.

And that's what Fortnite realized — make it free, and only our most loyal, diehard customers that are willing to spend lots of money will pay for the opportunity to differentiate themselves inside the game.

Actually, it’s like “I want to be a VIP.” Those people that go to the nightclub and order $300 bottles of booze, those are the ones that are paying for all of the other people in the club to essentially be able to pay $10 or $15 to get in, right?

It's the same business model online. These are the players that want to kind of like be seen as VIPs. The exclusivity is what they're paying for. Not the opportunity to play the game or to be in the nightclub.

There are competitors for time, not just revenue

MarketingSherpa: Fortnite is a great example of the non-traditional competitors mobile marketing can create. For example, Netflix has said that Fortnite is a bigger rival than HBO.

Teixeira: The reason that happens is that the amount of time that people have been playing video games has been rising pretty quickly in the past 10 to 15 years. The United States government does a very comprehensive survey (through the Bureau of Labor and Statistics). It chooses a few thousand people randomly in the US, and it has them their time during the whole day. It’s called the American Time Use Survey and it basically tries to figure out how much time are you spending sleeping, working, eating, playing. And there's like 2,000 activities that actually have codes. And I routinely look at the survey because it helps me understand how the average American is allocating their daytime.

And what I've observed in the past few years is the amount of time that people are dedicating to video games is rising much faster.

Obviously, since we have 24 hours, something has to give. Sometimes work gives, but it mostly doesn't come for work. It's coming from television viewing, and scripted shows, and movie watching. It's moving out of there and going into the bucket of video games.

So Netflix is not worried about ABC, NBC, CBS or something. They're actually worried about the big chunk of time that people use for leisure that is actually now growing into the video game market, people playing more video games are actually watching Netflix less. So definitely cause for concern if they're not in that business.

It's a matter of knowing who your competitors really are. And you’re exactly right. Your competitors really are the ones that are stealing your time [with customers]. If people start traveling more, they may have less time to watch Netflix. So, you know one argument can be that, in a broader set, Netflix’s competition is Airbnb.

Consumers are not going to change their behavior — charging slotting fees to overcome showrooming

MarketingSherpa: We talked about examples where companies did the disrupting, but I also want to talk about examples where companies were disrupted, and how they adapted to that.

One of the examples you use in your book is Best Buy. There is a huge challenge for brick-and-mortar marketers with showrooming. And so they found a way to overcome showrooming and coexist with Amazon. What can mobile marketers learn from Best Buy’s epiphany about adapting to mobile phone use?

Teixeira: it's no secret that about 70% of people who go to physical stores, once they realize what they want to buy, pull out their phone and try to compare prices online, right?

I don't need to explain to you how detrimental that is to a typical retailer that they spend all this money putting those products in their store, paying for the real estate, paying for salaries of salespeople, and then consumers get all the benefit … they go buy online, and the retailer doesn't make money out of that sale.

Amazon was one of the first big companies to get involved with that. It came out with an app and actually, in the beginning, paid people to go to the stores and pull out their phone to search online and gave them, I don't know, five or ten bucks to take a picture of an electronics product or scan the barcode or just plug in the SKU number or the brand. And people started doing that, and Best Buy became freaked out. They needed to figure out a way out of that. What they realized first is that they needed to match the prices of Amazon.

That's why Amazon was getting the sale because the prices are often cheaper, so they need to match the price. And that's what the CEO did, but unfortunately, that isn't the solution because you can imagine Best Buy has a much higher cost than Amazon. It has all of those stores, all that footprint and all of the sales people. And so selling products at the same price as a low-cost online retailer isn't going to be sustainable.

So what Best Buy realized is that they were giving a free pass to another set of customers, which were their suppliers — the Samsungs, the Sonys, the Apples — all of these suppliers. Basically, they [the suppliers] didn't care whether a consumer bought the product on Amazon or Best Buy, they were benefiting either way.

So what Best Buy realized is they needed to charge the manufacturers even when they didn't get the sale. Their old business model of just making money out of margins and goods sold when you buy the product wasn't commensurate with the evolving consumer behavior of showrooming. So they needed to evolve their business model. And the way they did that was by starting to, for the first time ever in the electronics industry, start charging for slotting fees. Which basically means that at Best Buy, Samsung and all of those other suppliers would have to start paying for the privilege to park its products in their stores. And if they had five TVs or 10 or 20 TVs, the more they had the more they had to pay, and this money started to become significant.

And with that, Best Buy was able to sell the product if people wanted to buy it in the store. But if people didn't want to buy it, Best Buy would still benefit by making money in terms of slotting fees. That was a huge change in the business model. And the broader point is this — consumers are not going to change their behavior.

So trying to fight the evolving consumer behavior, in this case, “showrooming” is not going to cut it.

You have to find a solution that doesn't go against the new consumer behavior but goes in favor, in line with that.

Point number two, Amazon is also not going to go away anytime too soon.

So trying to fight Amazon, go against Amazon would be a losing proposition for Best Buy. The way they solved this by charging manufacturers, if you think about it, doesn't go against Amazon, doesn't go against the evolving consumer behavior, and that was the beauty of it.

And that's how you get a sustainable business model changing into a very sustainable business model. Actually, now when I talk to the CEO of Best Buy, he even told me that they're partnering with Amazon in many other regards. So from enemies, they became friends.

Companies tend to try fighting customer behavior first

MarketingSherpa: That’s a great example of how Best Buy found a way to profit while aligning with the new customer behavior. It seems that some companies will try to fight the customer behavior, try to make the river flow backwards. Like the Telefonica example in your book where they were making money off the calling and texting, and with the rise of the mobile internet, people tried to find ways to work around that, like with a calling app, for example. So Telefonica tried to come up with new legislation to force customers to act in a different way. Telefonica fought them on that, to begin with, instead of trying to adapt to and find a pricing model in line with the new customer interests.

I think it’s a lesson to companies not to have an adversarial relationship with customers because they change their behavior, but try to find out how to serve that behavior.

Teixeira: No, I think you're exactly right. This idea of decoupling of a business model, whenever you're threatened, your first reaction is not allowing them to break it and gluing it back together. That was what Telefonica did, and that's what virtually all companies do in the early days. When Best Buy saw showrooming, it didn't want to allow showrooming. I talked to some people internally, they were thinking of using signal-jamming devices for the mobile phones in the store, the same ones that you use in prisons, to avoid people pulling out their phone and using it to showroom.

Why is that? Because this is the natural tendency when you see somebody doing something you don't like, breaking something of yours. Your natural first response is also always to glue it back again, and it takes a while for them to realize, “Look, we gotta allow consumers to do what they want to do.”

We can't fight them on that. And it's not the first instinct of brand managers, by the way. Every company that I talked to, most of them, most of the executives say they're very customer-centric, but they're not. They're very competitive-centric, very financial-centric.

They're not really thinking about what's most important for consumers, and we'll do that [for our customers], and then we'll figure out how to make money.

They're like, “we're losing money. We can't let our consumers do what they want.”

That is not customer centricity.

How can you reduce the three costs that all customers incur, whether they are B2B, B2C or government?

MarketingSherpa: Thank you for sharing a wide range of insights into mobile marketing, customer behavior and value that you discovered. If you could sum up all of your research, Thales, what is the top piece of advice you would give marketers? Do you have anything else to add, any other advice you'd give to mobile marketers?

Teixeira: Point number one is figuring out not what technology or what feature of the mobile phone you're using to create value, it's figuring out what is the benefit to the consumer and then backtrack on how you were going to use technology or business model innovation to deliver on that.

But ultimately it is about saving costs for customers and no matter what customer you're talking about … a business, an individual consumer, the government. And no matter what product or service you're selling — all consumers buying all products and services pay for those products and services with their money, their time and their effort. And so disruption is about finding ways to reduce these three currencies. We pay for everything with our money, with time or effort.

And the mobile phone is a way to reduce these costs.

How can you use the mobile phone to reduce the monetary cost that you're charging customers, the effort that they incur in order to procure goods and services, and the time it takes for them to get that? So that is the broader issue to really think about, in my view.

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