A Mercer

commentary

Serving customers digitally

Applying the right tools to support your business design

Why does British Airways sell less than 4 percent of its tickets online while

easyJet - in apparently the same market - sells 75 percent? It’s not because the

smart upstart “got it” and the incumbent didn’t. It’s because the two airlines

have radically different business designs and what works for one doesn’t work

for the other. Good digital investment is about fitness for purpose, and each

company must develop its own opportunities in providing digital service.

© Copyright 2001, Mercer Management Consulting, Inc. All rights reserved.


Exhibit 1: Fitness for purpose:
different opportunities for
different companies
Coherent business designs
Companies have wasted billions of dollars in trying to serve their customers digitally.
Some put a bad business online and created, as Michael Dell observes, “an online bad
business.” More troubling are the companies that put a good business online, only to
create another bad online business.
Yet now would be a poor time to walk away. Though the challenges are great, the
economic prize for getting digital service right is simply too great to ignore. It can
provide a powerful boost to both efficiency and effectiveness, which is invaluable in a
weakening economy. The right digital services can build competitive strength and
assure a quick rebound and a resilient market position when the economy turns up.
Where are the practical opportunities? That depends crucially on a company’s
business design. Compare two successful British airlines: easyJet, “the web’s favourite
airline” and British Airways, “the world’s favourite airline.” These taglines reflect an
enormous difference in business design, which makes a world of difference in the
economic benefits that digital service can offer.
EasyJet, the UK’s most successful low-cost airline, makes 75 percent of its sales
online - more than any other airline in the world. British Airways, like most other
major airlines, has a similar booking and sales functionality on its Web site. But the
site generates less than 4 percent of British Airway’s revenues. Online selling,
however, is only one aspect of a digital customer relationship. British Airways creates
value by offering post-sale digital services for its travellers. In making digital
investments, the trick is not to be guided by the American bumper sticker - “The guy
who dies with the most toys wins” - but to focus on fitness for purpose and the
capture of tangible economic benefits.
To draw a wider set of implications from the contrast of these two airlines, we focus
on three principal sources of value from serving customers digitally
(Exhibit 1):
• an improved customer experience
• reduced cost
• the ability to optimise the offers you make to individual customers
EasyJet, a low-cost airline, creates value from multiple sources through serving its customers digitally;
the Web has become a fundamental factor in its business design. British Airways, a traditional full-
service airline, serves a different market segment with a more complex offer. Its gains from digital
sales have been far less significant, but through a hybrid online/offline business design there is
opportunity to create value through other aspects of digital service.
Customer Cost Offer
experience reduction optimisation
• Clear and simple • Making the • Yield management
• Single, known customer through real-time
usage occasion work for you quotation on-line
• Real-time
• Accurate
• Inherently complex • Sales opportunity • Yield management
to configure a limited by user through product
flight behaviour and tiers and customer
• Multiple usage channel conflict tiers
occasions to • Some saving on
address (sales and customer service
post sales) cost post-sale
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Improved customer experience

Internet evangelists have created enormous expectations for the online customer
experience. We expect a trip to the Web to be quicker, easier, more personally
relevant, and richer in information and services all in one place. But of all the pieces
that go into serving customers digitally, the online experience has created the largest
shortfall between expectations and reality. Most Web sites make us appreciate the
incredible flexibility and processing power of the customer service representative
they displace.

The key to creating a good customer experience is to build any digital self-service
interface “outside in.” The interface must identify customers’ different usage
occasions and respond appropriately. This means applying a rare combination of
customer knowledge and customer empathy.

Both easyJet and British Airways sites have Choiceboard® service models (where
users select the service they want) that are designed “inside out.” The Web site
solicits from the user the information that the airline needs to sell a ticket. It doesn’t
cater to the way that customers specify their needs. On both sites asking the typical
question “What’s the best price you have for flights to Barcelona for a three-day
weekend in June?” would take eight separate search attempts (four different
weekends, Friday-to-Sunday or Saturday-to-Monday).

EasyJet at least benefits from the simplicity of its straightforward, price-based value
proposition. The choices are few, and are reflected in simple screens with prominent
prices. A no-nonsense Web site, even designed inside out, can serve a no-nonsense
airline.

British Airways’ customer experience is more challenging, because the scope of the
business is much more complicated. British Airways serves multiple countries (vs.
easyJet’s UK focus); provides itineraries with multiple hops delivered through
multiple airlines; and offers flights bundled with other travel services. That’s before
adding the many parameters of the product itself: four classes of travel before
discounts; special meals; seat reservations; three tiers of loyalty club membership; and
a reward currency. As another major airline has privately commented, “It’s not
surprising our Web site is horrible for customers to use: Look at the size of our route
network and our fares manual.” Offline travellers are shielded from this complexity
by a customer service representative. Online, they are on their own.

British Airways is far more representative of the norm than easyJet. That’s why fewer
than 3 percent of visits to e-commerce sites result in a purchase - a ratio that’s not
sustainable for either the merchant or customer.

Organisations trying to deal with this complexity, as the quote above illustrates, tend
to focus on the complexity of their own offer. They neglect the additional complexity
of what the user is doing. Customers move gradually through a sequence of learning
about a category or a product; choosing and buying the item; getting it delivered
(whether virtually or physically); paying for it; using it; and maintaining, modifying
or upgrading it. The challenge is managing this dual complexity. If customers are
buried in any one of these activities and your Web site assumes they are doing
something else, communication will be at cross-purposes.

To some degree, good Choiceboard model design can simplify the experience. Take
Frictionless Commerce, a provider of white-label Choiceboard models for both e-
selling and e-sourcing. It tries to keep users engaged by designing Choiceboards that:

• give users a first, coarse set of results after two clicks, rather than presenting a
whole questionnaire

• ask users to select a pre-defined profile that best fits their description, then allow
them to adjust particular characteristics as required

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 • always return a “closest fit” recommendation if no exact fit is available, rather
than ever saying “no”

But even these streamlining efforts can present users with more complexity than they
have the patience for. The classic Internet Choiceboards, such as Dell’s configurator
for buying personal computers and Schwab’s brokerage offers, have specific
characteristics that contribute to their success. In both cases, the usage occasions are
well defined. Customers are buying a personal computer or trading stocks, and this
clarity helps designers build a Choiceboard relevant to the user. These occasions also
justify demands on the user’s patience. The Dell purchase is a high-stakes
transaction. Customers will have to live with the computer they buy for the next
three years; they accept complexity because it provides the richness of information
and choice that they want. Trading with Schwab is, for many users, a regular activity.
They find it’s worth their time to learn the interface, as with any frequently used
application software.

Users are generally far less patient with other complicated screen-based interfaces. A
transatlantic business-class air ticket costs more than a Dell computer but the airline
industry, to its credit, has educated travellers to treat this ticket as a low-stakes
impulse purchase. Compared to stock-trading, less habitual financial services
transactions have not done well on the Web. Although 25 percent of American stock
trades are done online, only 0.2 percent of insurance policies are bought this way.

Most companies find that the complexity involved in presenting their products online
will quickly exhaust a user’s patience. Such companies must zoom straight to a
particular service and usage occasion, typically based on some previous engagement
with the user - hence the power of the hybrid online/offline business. At British
Airways most travellers do not want to choose, configure, and buy a complex
itinerary online. But once they have created these itineraries, they may value online
access, wireless notification of delays or other changes, and wireless check-in - all
services the company is working to provide. And when the usage occasions are
known, the Web works well. The company’s Web site for booking flights using BA
Miles presents a Choiceboard built around specific usage occasions such as “Where
can I go given my miles balance?” and “Which days in July are there miles flights
available to my destination?”

Reduced cost

Cost reduction is one of the most obvious and seductive goals of serving customers
digitally. There is a whole menu of ways in which digital service can reduce costs:

• Making the customer work for you. Digital self-service can replace sales and
customer service staff.

• Accuracy. Direct data entry by the customer avoids re-keying and other errors in
paper-based systems.

• Working in real time. As pioneered by Dell, such systems can procure system
components to customer order. This avoids unsellable inventory and can create
negative working capital. (Dell pays component suppliers after receiving payment
from the customer.)

The key here is to ensure that customers want to co-operate with your low-cost
digital model - and that what you build in practice provides the opportunity for them
to do so (see sidebar Building what you intended).

As a low-cost airline with aggressive pricing, easyJet committed from the outset to
selling tickets direct to customers in order to eliminate travel agents’ commissions.
Its original direct model was by telephone. Shifting customers from the call centre to
the Web site has several major advantages. It saves call centre costs (which are
significant as a fraction of an easyJet ticket price), avoids the risk of losing customers

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Building what you intended

Detailed customer knowledge and good business design are just half the battle. The
other half is creating a digital service that operates as intended. Serving customers
digitally typically means both cutting across organisational silos and integrating new
information systems - two of the more notorious implementation headaches. While
every situation is different, Mercer’s implementation experience suggests a few
guidelines for a joined-up approach to serving customers digitally:

Involve and reward the channel. On the Internet, as elsewhere, it is essential to be

where your customers are. A Web site alone doesn’t achieve that. Channels that will
bring customers to your site must be designed from the beginning into both the
technology architecture and the business design. Resolving channel conflicts - even
between internal channels - requires communication and alignment of incentives. The
initial resistance of the sales staff can die away once they begin to view the Web site as
a productivity tool for them, and - to the extent that it does bring in new customers,
from search engines or portals - as a source of new leads.

Address multiple usage occasions through a portfolio of tools. In the world of

digital self-service, the customer may be doing many different things at different times.
Applying the right tools to the right usage occasions is key to a satisfactory customer
experience. The table below summarises the main categories.

Consumer Needs Description Relevant Tools

Information/reference Detailed content for Product catalogues

researching topics or Store locator
product/service categories Product locator and specifications

Decision support Personalised advice to simplify Recommendation-engine

the search process: defines Choiceboard
options and aids in selection Product reviews (peer and expert)
Virtual models

Purchasing solutions One-stop shop for a given need Strategic partnerships

Hybrid convenience Multi-channel online/offline Online reservation/in-store pick-up

approach to sales and service Hybrid return policy
In-store kiosks

Customisation Tailored product/service Custom-configuration

designed to individual Choiceboard
customer specifications

Balance technology investments in the front and back ends. Some companies
have put all their effort into an attractive customer interface, but then have been
unable to fulfil satisfactorily what customers ask for. Others have focused on the newly
enabled sophistication of back-end systems, running real-time personalisation of their
site’s content, but then paid insufficient attention to developing an offer that will
attract customers in the first place. Balance means having a clear view of the target
technology architecture, mixed with a pragmatic, step-by-step approach to each release
of functionality. When developing a front-to-back system, focus on system functionality
rather than deploying a fully automated process. In the first weeks of operation, when
volumes are low, transferring data between discrete systems manually typically has little
cost or risk. But this partial deployment provides an ideal test environment to get the
system right. After the launch but before volume builds, you can replace these manual
interfaces with active middleware to provide a true end-to-end digital process.

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to competitors due to call centre congestion, and makes the airline scaleable without
the costs, risks, and supply shortfalls of quickly growing call centre capacity.

Set against these benefits is the realisation that, for most brands, a Web site is not a
channel. A Web site requires a channel to bring customers to it, and the cost of
attracting customers was the downfall of many a dot-com. Incumbents have more
scope to exploit their offline channels to bring customers online. EasyJet, for
example, paints its Web address in huge orange letters down the fuselage of its
aircraft, adopts the tag line “the web’s favourite airline,” and still passes much of its
saving on to customers through a £5 incentive that encourages customers to book
online.

British Airways’ business design offers less opportunity to reduce costs by selling
online. The complexity of the customer experience, described above, is the biggest
barrier. Adding to the challenge is that the airline’s core market of UK business
travellers largely book through other people - travel agents or administrative
assistants in their offices. So far nothing British Airways has been able to offer on its
Web site has provided an adequate incentive for UK business travellers to change
their behaviour. As the company must amortise the fixed costs of developing the Web
site and back-end systems across just a handful of travellers, selling tickets online has
probably increased the airline’s costs.

The airline is now targeting the corporate buyer rather than individual business
travellers. It is offering corporate extranets - similar to Dell’s successful offer of
computer-ordering systems tailored to particular corporate clients. But British
Airways is limited in what it can do by channel conflict. It continues to depend
heavily on travel agents. Corporate clients are also unwilling to unseat the agents.
They appreciate the service and the agents’ ability to negotiate with the airlines;
much of the travel agents’ commission is also passed on in various forms to their
clients. British Airways is therefore focusing on streamlining the existing system,
providing extranet services for their travel agent partners, rather than attempting to
cut out the intermediary.

Optimised offers

Imagine being able to tailor the offer you make to a particular customer at a
particular time, based on that customer’s service preferences, their willingness to pay,
their value to you, and the opportunity cost to you of the service or product you are
offering. In the digital world you can - in theory - know all of those parameters, and
can tailor the offer in real time and present it to the customer individually. And
almost nobody is doing it.

The key is to adopt a fact-based and de-averaged view of customer behaviour and
economics. Without this, the immense targeting and tailoring power of digital
relationships will be misdirected (see sidebar The unrecognised loyalty of online
customers).

So where do easyJet and British Airways stand? All airlines target and tailor their
offers, a practice known in the industry as yield management. The object is to fill as
many seats as possible without cannibalising the value of a high-price ticket. Airlines
offer cheap tickets for seats that would otherwise go empty and that thus have a low
marginal cost. To ensure that these tickets are bought by incremental travellers, not
full-fare business customers, they impose restrictions such as Saturday night stays,
advance booking, and no flexibility to change flights. Airlines also use loyalty
programs to identify their best customers and they develop special offers designed to
retain and expand these relationships.

Here easyJet has a particular challenge. Yield management is critical. Although a

low-cost airline, easyJet must fill more than half of its seats to break even. But
without a loyalty program, it doesn’t know who its individual customers are, so it has
no ability to tailor offers for them. Instead, easyJet uses real-time offer optimisation
in a new approach to yield management. This capability is perhaps the most powerful
way in which easyJet captures value from its digital service.
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 The unrecognised loyalty of online customers

Exhibit 2: Online users can be

relatively price-insensitive and % of on-line customers
loyal Relative utility for e-shoppers shopping with other retailers

90
Price
100 In stores

80
Delivery In
70
catalogues

Payment 75
Options 55 On web
sites

0 50 100
Online
Source:Mercer
Source: Mercerretail
clientclient
research
example Offline

Companies using the Internet have been unnecessarily fatalistic about price, and about
their ability to form strong customer relationships. Aware that competitors are “just
one click away,” they have anticipated a world of price comparisons and total
transparency. Faced with this prospect they have rolled over and played cheap.

Reality has turned out differently. A competitor site may be just one click away, but
finding something useful in it requires many more clicks. Our research with one hybrid
(online/offline) retail brand serving consumers and small businesses shows that its
online customers have lower price elasticity and greater brand loyalty than other
customers. They come to the Web for convenience and service, more than price. While
these customers quite frequently go to a competitor’s stores and occasionally use a
competitor’s catalogue, they almost never visit a competitor’s Web sites. The reason is
relative convenience. They often find themselves outside a competitor’s store when it’s
not worth driving to their preferred store. Or they come upon a competitor’s catalogue
and flip through its pages. But whenever they go online, they can reach their preferred
site as easily as any other - and even more easily if it is bookmarked.

Because it sells only through its own - direct - Internet and call-centre channels,
easyJet can change prices dynamically to suit the market: day to day, flight to flight.
As the day of a flight approaches, the price will move up or down, depending on the
scarcity of available seats. Price-sensitive travellers will compromise on their
preferred timetable to take a cheaper seat on a less full but less convenient flight.
Less price-sensitive travellers will pay the premium for late seats on popular flights.
Seat prices are quoted on the Web site in real time: A request for a greater number of
seats may result in a higher quoted price for the same flight, reflecting the greater
opportunity cost to easyJet as availability is reduced.

The easyJet approach might seem to come at a cost. Depending on prevailing

demand, easyJet’s prices can vary wildly: The price of different flights to the same
destination on the same day may vary by a factor of three. For easyJet’s regular
business budget travellers, being faced sometimes with virtually full-price fares can
make budgeting difficult, and could compromise easyJet’s brand promise as a low-
cost airline. How the pricing is communicated is therefore critical. Although the
price can be high at short notice, easyJet clearly displays prices up front, in such a
straightforward way that it is seen to be fair. This sustains easyJet’s brand reputation

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 and at the same time maximises margins. It’s a recipe for the 88 percent annual
revenue growth and 10 percent net profit margin that easyJet has achieved
(Exhibit 3).

Exhibit 3: Comparison of key

easyJet British Airways
financial ratios (2000)
Enterprise value / sales 4.9 x 1.6 x
EBIT margin 10.9% 4.3%
EBITDA margin 17.4% 12.0%
Revenue growth 88.6% 3.0%
Return on capital employed 16.7% 4.6%

Source: Schroder Salomon Smith Barney January 2001

easyJet figures are actuals, British Airways are SSSB estimates, due to different reporting calendars

British Airways exemplifies the traditional approach to yield management, and at

customer relationship management more broadly. Its Executive Club program
successfully uses carefully and quantitatively tuned benefits to attract an increased
share of the travel spend of its best customers. It presents its optimised offers within
the framework of a largely static fare structure.

At British Airways, the role of the digital relationship in offer optimisation is

currently marginal. The mix of channels the airline uses dictates that the yield-
management offers must be embedded in the product, not the channel. This
complicates the digital user experience, as described earlier, and doesn’t easily
accommodate innovation within the digital channel itself. The company does offer
facilities on its Web site for “managing” your Executive Club membership online,
but in practice today there is little managing to be done. There is little yet to attract
the majority of flyers online, or to form the core of a digital relationship. The
opportunity that digital service provides to personalise frequent flyer programs is,
however, of growing interest to the major airlines.

As the British Airways case suggests, online offer optimisation remains an elusive and
undeveloped opportunity for most major companies. EasyJet illustrates that offer
optimisation will develop in a variety of ways, not just as commonly depicted. The
scope of easyJet’s optimisation is quite narrow: it adjusts its offers according to seat
availability (i.e., cost), but in its model it can pay little or no attention to customer
preferences (except through self-selection) or lifetime customer value. But the key
feature that easyJet demonstrates is the deliberate creation of variance between
different offers that the company presents to customers.

Too many companies are depending on post-hoc analysis to understand why

customers did what they did. They are squirreling away their “click-streams” in huge
volumes for future analysis, but they will mostly be disappointed. Click-streams
reveal little about what drives customer behaviour. They tell you how customers
behaved under a particular set of conditions in the past; but those conditions
generally contain too little variance in price and other factors to reveal the causality
that would help you drive behaviour in the future.

Digital relationships provide an ideal setting for an alternative approach to offer

optimisation. The key is to deliberately set up a wide variance in conditions, and test
customer behaviour under different combinations. Using this approach we have
found that the best combination of conditions typically yields a result - such as a
customer response rate - four or five times higher than the organisation was
previously achieving (see sidebar The NexperimentTM approach: Affordably knowing what
drives customer response).

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 The NexperimentTM approach: Affordably knowing what drives customer response

Digital customer relationships provide both the need, and the opportunity, to fine-tune
all sorts of offers and communications to achieve the most favourable customer
response. The need arises because customer responses have been quite disappointing.
Too many customers are lost at each stage of the sales funnel (e.g. click-through from
e-mail solicitations, conversion of visitors to buyers, abandoned shopping carts) and the
losses accumulate geometrically. Small differences in presentation, however, can have a
big impact on customer response. Since digital communication formats are new, there is
little intuitive knowledge of what works best.

Fortunately, the opportunity for fine-tuning has never been better. Companies have
long been able to test customer response to different combinations of an offer’s
features, either in quantitative market research or in carefully constructed in-market
experiments. But the cost and lag-time involved restricted the use of these techniques to
occasional big product launches.

Using Mercer’s NexperimentTM (patent pending) approach with digital media, the same
proven statistical techniques can be used routinely to test how customers respond to any
stimulus, and therefore to design all the offers you make. This includes not just the
pricing and features of major products, but even the layout of
a Web page or the wording of a simple e-mail.

Case example: 4X improvement to e-mail response rate

A company selling Web hosting to small businesses was using an outbound e-mail
campaign to attract prospects to its Web site. Only two in every thousand recipients
responded by visiting the site. How could that rate be improved?

With the company, we looked at the e-mail script as an offer to the customer, and broke
it down into different attributes: the subject line, the mention of price, the call to
action, the incentive offered, and the association with the brand of the network
beneath the service. For each of these attributes we looked at significantly different
options. Should we mention the price? What should we invite recipients to do on the
site: learn, register or buy? And so on. There were ninety-six combinations in all.

There is no need to test each combination. Because the experiment is set up under
controlled conditions, the results from the particular combinations tested can be used to
model statistically how customers would have responded to any other combination. We
needed to test only sixteen.

The results showed that the best intuitive guesses made by our client team, and
ourselves, were the most effective option for only one of the five attributes. The
optimum script (Exhibit 4) multiplied the response rate by a factor of more than four -
dramatically increasing the reach the client achieved using available e-mail lists.

Exhibit 4: E-mail script design Product Network

elements (web hosting Subject Line Pricing Call to Action Promotion Brand
service) Mention Mention
[Product name] Base price Check out our Deep discount Server sits on a
- fast and mentioned in web site and for 1st two Tier 1 Internet
reliable e-mail learn about us months backbone
or x or x or x or x or
We'll get your Base price not Check out our No set up fee Server sits on a
business on the mentioned in web site to or [brand name]
web fast e-mail register 60 day trial Tier 1 internet
or period backbone
Check out our or
web site to buy No promotion

Version driving highest customer response

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The statistical disciplines behind this approach - experimental design and response
modelling - are well established. What’s new in a digital environment is the
practicality of applying these disciplines quickly and cheaply to optimise a wide range
of day-to-day business activities. If you plan in advance, digital relationships can
indeed provide valuable customer information and potent opportunities to optimise
offers.

Still want to walk away?

The comparison of easyJet and British Airways shows that serving customers digitally
introduces a versatile new toolkit with many capabilities. You can move from
guessing about customer needs to knowing; from working in lag-time to real-time;
from supplier service to customer self-service; from product mismatches to a perfect
fit. Applying this toolkit in isolation achieves little, especially if customers do not co-
operate with your vision. Picking tools that suit your customer relationships and
business design, by contrast, achieves much. This is true whether your customers are
consumers, small businesses, individuals within a corporation, or corporate buyers.

With a steady focus on fitness for purpose, you can now create a set of digital services
that will make your company unique in the marketplace. By providing a richer, more
fulfilling experience, carefully attuned to customer priorities, digital services can
create incredibly loyal, high-value customers. By focusing on where and how your
customers want digital self-service options, you can successfully slash your operating
costs. By adopting a fact-based and de-averaged approach to customer behaviour, you
can gather critical information and generate optimised offers that capture
tremendous value for customers and shareholders alike.

If your competitors are walking away from the opportunity, so much the better. The
time to make your company unique is now.

For more information related to this Commentary, please contact one of the following Mercer
Management Consulting partners:

Simon Glynn, London, 44/ 20 7915 9229, simon.glynn@mercermc.com

José Taboada, Lisbon, 351/ 21 311 3883, jose.taboada@mercermc.com

Warren Thune, Washington, 1/ 202 778 7257, warren.thune@mercermc.com

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About Mercer As one of the world’s premier corporate strategy firms, Mercer Management
Management Consulting Consulting helps leading enterprises achieve sustained shareholder value growth
through the development and implementation of innovative business designs.
Mercer’s proprietary business design techniques, combined with its specialised
industry knowledge and global reach, enable companies to anticipate changes in
customer priorities and the competitive environment, and then design their businesses
to seize opportunities created by those changes. The firm serves clients from 23
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