Demand_Creating What People Love Before They Know They Want It Read online

  Also by Adrian J. Slywotzky

  Value Migration

  The Profit Zone

  Profit Patterns

  How Digital Is Your Business?

  The Art of Profitability

  How to Grow When Markets Don’t

  The Upside

  Copyright © 2011 by Oliver Wyman

  All rights reserved.

  Published in the United States by Crown Business, an imprint of the Crown Publishing Group, a division of Random House, Inc., New York.

  www.crownpublishing.com

  CROWN BUSINESS is a trademark and CROWN and the Rising Sun colophon are registered trademarks of Random House, Inc.

  Tetra Pak, Tetra Pak Classic Aseptic, Tetra Pak Rex, Tetra Pak Wedge, Tetra Pak Hoyer DeepBlue, and Tetra Pak Prima Aseptic are trademarks of Tetra Pak International. Yellow+Blue is a trademark of J. Soif, Inc.

  Library of Congress Cataloging-in-Publication Data

  Slywotzky, Adrian J.

  Demand: creating what people love before they know they want it / Adrian Slywotzky.—1st ed.

  p. cm.

  1. Demand (Economic theory). 2. Supply and demand. I. Title.

  HB801.S56 2011

  658.8′343—dc22 2011009633

  eISBN: 978-0-307-88734-4

  Jacket design by David Tran

  Jacket photograph by Mike Kiev, www.dreamstime.com

  v3.1

  For Alexander

  CONTENTS

  Cover

  Other Books by This Author

  Title Page

  Copyright

  Dedication

  THE MYSTERY OF DEMAND

  1.

  MAGNETIC

  Zipcar Invents a New Kind of Freedom

  From Ho-Hum to Gotta-Have-It:

  Wegmans Makes Groceries Magnetic

  2.

  HASSLE MAP

  The Long, Rocky Road to a One-Click World

  Better Than a Bonus:

  Bloomberg Builds a Service Traders Just Won’t Give Up

  CareMore Connects the Health Care Dots

  3.

  BACKSTORY

  It’s What You Don’t See That Counts:

  Behind the Kindle Screen

  Tetra Pak Steps Out from the Backstory

  4.

  TRIGGER

  Netflix and Its Two-Hundred-Year-Old Secret Weapon

  Nespresso and the Demand That Almost Wasn’t

  5.

  TRAJECTORY

  Getting Smarter Faster:

  Teach For America’s Drive to Reshape Educational Demand

  The Best Lunch Ever:

  Pret A Manger and the Quest for the Perfect Sandwich

  6.

  VARIATION

  Selling the Symphony: It’s Not Just About the Music

  The Seattle Opera Grows Its Audience One Member at a Time

  Demand Variation, from the Corner Store to Eurostar, the Eighth Wonder of the World

  7.

  LAUNCH

  The Achilles’ Heel of Demand

  8.

  PORTFOLIO

  “Nobody Knows Anything”

  9.

  THE BIGGEST SPARK

  Scientific Discovery and the Future of Demand

  CODA: THE DEMAND CREATORS

  SOURCE NOTES

  ACKNOWLEDGMENTS

  About the Authors

  The Mystery of Demand

  YOU LOVE IT as soon as you see it. Something about it resonates inside you, though you can’t articulate just why. You rave about it with the same passion that you rant about the things you can’t stand. Then you see the long lines forming and hear the excited conversations starting. You realize there are thousands, maybe millions who feel the same as you. And for some reason, something else that seems just as good is met with indifference and dead silence.

  Demand is an unusual form of energy. It turns many wheels big and small, from economies to markets to organizations to our paychecks, here and around the world. Everything depends on it. Without it growth slows, economies falter, progress stops. Yet do we understand where demand actually comes from? Can it be created, and created repeatedly?

  We often think that demand comes from pulling the right levers: more marketing, better advertising, more aggressive sales efforts, distributing coupons, offering discounts. Tactics like these do have their time and place, and they can bring short-term results.

  But real demand is not about any of these things. Demand creators spend all of their time trying to understand people. They are acutely aware of how hopeful, jaded, funny, impulsive, unreasonable, irascible, ambitious, distrustful, enigmatic, enthusiastic, frustrated, and unpredictable we really are. They try to understand our aspirations, what we need, what we hate, what gives us an emotional charge—and, most important, what we might really love. By watching how people actually behave in their own worlds, and by talking to them constantly, demand creators figure out how to solve the big and little hassles we all face—and they make our days easier, more convenient, more productive, and simply more fun. They seem to know what we want even before we do. They wind up creating things people can’t resist and competitors can’t copy.

  Yet they almost never succeed on the first try. They know that real demand comes from connecting the dots between the human factors and a quirky, ever-shifting combination of other elements: financial and emotional costs, social norms, infrastructure, product design, patterns of communication, and many more. It comes from understanding how all these factors interact in complex, unpredictable, and counterintuitive ways. And it comes from a way of thinking that makes the leap from trying to convince people to buy something to human understanding, to seeing the world through the eyes and emotions of the customer. A dozen cylinders have to click into place before the vault door swings open. But when it does, wonderful things happen—for all of us.

  In this book we’ll tell the stories of an amazing group of demand creators and those who work with them. And while every demand story is unique, they all start in the same place: a person, a problem, and an idea.

  ONE DAY IN 1997, a man named Reed Hastings was puttering around his house, bundling up old newspapers and sorting through stacks of mail-order catalogs, when, underneath a pile of forgotten junk, he stumbled across an unwelcome surprise. It was a VHS cassette of the movie Apollo 13—the same cassette Hastings and his wife had enjoyed one evening six weeks earlier.

  The same cassette, he realized with a sinking feeling, he should have returned to Blockbuster the next morning.

  His first thought was to calculate the late fee: forty dollars—almost enough to buy the darned cassette. A petty annoyance, troubling mainly because it represented the penalty for Hastings’s carelessness.

  Far worse was his second thought: What will my wife say? And knowing that she would probably say nothing at all made the situation that much more painful. Hastings could imagine it with utter clarity. Like long-suffering spouses everywhere, she would react with a simple eye roll—“an eye roll that could kill,” as Hastings described it.

  Millions of us have been there. But for Reed Hastings, unlike the rest of us, the embarrassment triggered a question—a question about the mechanics of movie rentals and the hassles they created.

  It happened later in the day, when Hastings, still annoyed over the forty-dollar late fee, was on his way to the gym. “How come,” he wondered, “movie rentals don’t work like a health club, where, whether you use it a lot or a little, you get the same charge?” And that led to other questions: Could a movie rental business actua
lly work that way—charging a flat membership rate and no late fees? Would the customers ever return the movies without the pressure of a late fee? Could you keep enough movies in inventory to satisfy customers? How would the economics work?

  Hastings started tinkering with the idea, first on paper, then in real life. Eventually a business was born—Netflix, which grew into one of the fastest-growing companies of the twenty-first century.

  It retrospect, the idea seems obvious. Who wouldn’t want a movie rental system that eliminated late fees (and the irritation they produce) along with a dozen other petty inconveniences? Yet the growth of Netflix happened under the very noses of the executives at Blockbuster, who watched Netflix grow for nineteen straight quarters before they decided to launch their own video-by-mail service. And in the process, Netflix managed to outmaneuver a host of rival companies that seemed far better positioned to take advantage of the opportunity—not just Blockbuster but also such retailing and show-business giants as Walmart, Amazon, and Disney.

  How did this happen? Why was Reed Hastings able to see the potential for a billion dollars’ worth of demand in the same consumer hassles most of us experienced but ignored or merely complained about?

  This mystery is a small example of the bigger mystery that is the subject of this book—the mystery of demand.

  In the United States, millions of people inhabit homes that are crowded with things, yet live lives overflowing with frustrations, inconveniences, complications, risks—hassles of every sort. No matter how much we consume, there remain huge gaps between what we really want and the goods and services we settle for. Those gaps represent opportunities for the creation of new demand—as Reed Hastings recognized.

  WHILE THE IDEA for Netflix was germinating in the mind of Reed Hastings, another demand creation story was taking shape on the other side of the planet. And while the setting and many of the details couldn’t be more different from those in the story of Netflix, the underlying mechanism was strikingly similar.

  Babu Rajan is a fisherman in Pallipuram, near the southwestern coast of India. By developed-world standards, Rajan is poor. The only significant asset he owns is the one that he and an informal consortium of fourteen fellow fishermen rely on for their livelihood: a seventy-four-foot, steel-hulled boat, the Andavan, in which they troll the Arabian Sea searching for schools of sardines, the cheap, plentiful fish that feed millions of hungry South Asians. It’s the same way of life that Rajan’s father and grandfather followed, right down to the half-mile-long net he uses to gather his catch and the sticks of incense he burns for good luck in the tiny Hindu shrine tucked into the ship’s bow.

  Some days, Rajan’s luck is good. His predawn excursion may yield a catch of ten thousand pounds or more and net $1,800 or more for the boat’s crew to share. Other days, their nets come up empty, or nearly so; the lesser haul is barely enough to pay for diesel fuel. The unpredictability of the ocean’s harvest makes it doubly important for Rajan to maximize the value of what he catches.

  And here is where the relentless power of nature plays a cruel role. After ten or twelve hours at sea, having gathered whatever bounty the ocean has to offer that day, Rajan and his fellow fishermen pull into the nearest port, where they are met at the dock by the local seafood wholesaler. With the fierce tropical sun beating down, both Rajan and the wholesaler know that the fish won’t last long. There’s no time to travel from port to port, gathering competing offers from rival wholesalers. Rajan has no choice but to accept the dealer’s offer, and hope for a larger catch tomorrow. The unyielding logic of the situation is one reason generations of Indian fishermen have been unable to work themselves and their families out of poverty.

  At least, until recently. Around 2003, Babu Rajan did the same thing millions of other rural Indians were doing: He managed to scrape together nearly an average month’s income to buy a tool his father and grandfather could only have dreamed about—a cell phone. Now his life and work are dramatically different.

  Today, as Rajan trails his net in the Arabian Sea, the cell phone, hanging in a protective plastic case from his neck, rings periodically with calls from wholesalers in a dozen nearby ports. “How big is today’s catch?” they want to know. “When will you be bringing it in? And have you received any other offers?”

  “When I have a big catch,” Rajan reports, “the phone rings sixty or seventy times before I get to port.”

  Now Rajan is able to entertain offers from several wholesale dealers, playing one against another in the classic mode of free markets everywhere. Only after agreeing on the best price available does he select the port to which he’ll deliver his catch. As a result, Rajan’s family income has more than tripled in the last decade, bringing them a series of luxuries once unheard-of among India’s rural poor—electricity, television, schooling for his children.

  The impact of the cell phone in rural India extends beyond fishermen. Until recently, farmers in India in need of information to guide their planting relied on the same low-tech tools they’d employed for millennia: guesswork, tradition, word of mouth, even religious rituals. The result: extreme vulnerability to market swings, droughts, floods, crop diseases, and other forms of economic disaster. Each year more than a third of India’s fruit and vegetable output would go to waste due to market failures caused by information shortfalls.

  Today, this is changing, thanks to the advent of the cell phone. More than 40 percent of farmers in Indian regions from Uttar Pradesh in the north to Tamil Nadu in the south now have access to mobile services providing agricultural information. They can receive voice or text messages with customized market data, such as minimum and maximum prices for a particular crop at specified local markets and the volume of the crop arriving that day. Other voice messages offer how-to advice on topics such as weed control for rice paddies and cultivation tips for bananas.

  An American farmer might take such information for granted. But its impact in the developing world is remarkable. Studies show that Indian districts with high rates of cell phone usage climb faster and further out of poverty, creating, in turn, more demand for cars, houses, store-bought clothes and food, and high-end services from health care to education. It’s demand fueling demand, with growing society-wide prosperity as the result.

  The product driving this trend is the Nokia 1100. Consumers in the developed world are often startled when they learn about the sheer scale of demand for this Finnish cell phone. Consider some of the most impressive high-tech product launches of the past decade: Within five years of introduction, the Nintendo Wii game system sold 45 million units. In the same time frame, 50 million Motorola RAZRs, 125 million PlayStation 2 consoles, and 174 million iPods were sold. And the Nokia 1100? In that product’s first half decade, 250 million were sold, mostly in some of the world’s poorest countries. Those numbers make the Nokia 1100 the bestselling consumer electronics device in the world.

  Crucial to the success of the Nokia 1100 is its design. Features that make the 1100 an invaluable tool for life in rural South Asia, Latin America, or sub-Saharan Africa have been included; every other feature has been ruthlessly simplified or stripped away completely. At the same time, the 1100 offers options few Westerners would think of. For example, it can store multiple contact lists—essential in a phone that may be shared by many users in a village. The 1100 also allows the user to enter a price limit for a particular call, much like prepayment at a gas station—another feature that supports communal use. There’s a built-in flashlight, radio, and alarm clock—valuable accessories where electrical service is unreliable. And the 1100 is available with screen displays in more than eighty languages, or with visual symbols to serve the illiterate customer.

  The Nokia 1100 is a triumph of insight and creativity. Nokia’s engineers managed to see the world through the eyes of a South Asian farmer, recognized and empathized with the hassles he faced, and designed a product that can dramatically reduce them—transforming millions of lives, and creating huge new demand in th
e process.

  NETFLIX AND THE NOKIA 1100 vividly illustrate the complexity—and the world-altering power—of the art of demand creation. And the more we’ve learned about these stories, and many others like them, the more we’ve realized that demand is a lot more complicated and more fascinating than we once thought.

  But why does it matter? Why is the mystery of demand important, not just to business executives and economic policy makers, but to all of us? The answer lies in the dramatically changing shape of our world.

  We live in a time of two economies. One dominates the headlines and the TV news. It’s the economy that became mired in recession in 2008, in which millions are unemployed, millions more are underemployed, companies are reluctant to invest, factories have fallen silent, and one industry after another—from cars to electronics to airlines to retailing to energy to housing—is experiencing stagnation. In this economy, the once-reliable engine that drove growth and prosperity for decades—consumer demand—has somehow become broken, with painful consequences for all of us.

  In the same time and same space, there is another economy in which the demand engine is almost ridiculously strong, operating in overdrive. In this economy, a handful of companies are not just doing better than their competition, they are doing exponentially better. They enjoy runaway growth, premium pricing, and extraordinary customer loyalty because they create new products and services that not only attract demand but actually excite people. In this economy, companies are growing, profits are robust, customer loyalty is powerful, jobs by the hundreds of thousands are being created, and the lives of millions of people are being enhanced in ways large and small.