Historically, consumer packaged goods (CPG) were designed to be sold in a brick-and-mortar retail environment — in packaging flashy enough to catch a consumer’s eyes while presenting the right information to compel a purchase. But packaging doesn’t need to sell the product anymore. The Internet is becoming the primary channel for marketing and sales, customer experiences are being tailored to reflect our “smart” and “connected” world, and data has become the most valuable commodity to target the right customers at the right time. Producers have new ways to optimize. They may choose more environmentally friendly, cost-effective, or shippable packing. More critically, they may design the product to be the primary relationship manager with the end user.
What exactly does it mean for a product to be a customer relationship manager? The product itself will use digital technology to interact with the customer, pre- and post-purchase. On one end of the spectrum, this is manifested in products with actual screens and Internet connectivity as we’re seeing with smart home products like dishwashers. On the other end, with a few embedded components, Johnny Walker’s Blue Label whiskey bottle knows exactly when a user opens and closes the bottle, continuously generating valuable information on user behavior. These technologies and the data they generate will enable the producer to track the product through the supply chain, to know exactly when the consumer may need the product replenished or fixed, and when there may be an interesting opportunity to upsell or cross-sell, based on purchase and ownership behaviors.
A perfect example of this kind of “product relationship management” is unfolding now with Tesla. The traditional automotive sales cycle focuses on building and maintaining a relationship with the customer pre-purchase — when GM markets and sells you a car, they use media channels like Facebook to target you online and a salesperson to build a relationship with you at the dealership. Once the purchase is consummated, GM uses OnStar for navigation and remote diagnostics, although user reviews have been spotty. Tesla, on the other hand, uses the car itself as a relationship manager, monitoring for necessary repairs, using AI to refine its understanding of customer habits and needs, and upgrading performance with a constant stream of software downloads. This has established a new normal for auto makers: a persistently connected product. As a result, Tesla is much smarter when it comes to selling after-market features or knowing when it’s time to tell you about a new car. This is one reason Tesla’s customer satisfaction ratings are through the roof, even though the company is barely a decade old.
This example is just a glimpse of where we’re heading, with respect both to “smart, connected” products like Teslas and iPhones and to “not-smart, not-connected” products like packaged goods. Eventually, we will start to think of the universe of CPG products not simply as products to be used and discarded but as valuable sources of data on user behavior and preferences. We recently had a conversation with Niall Murphy, the CEO of the Internet of Things (IoT) smart products platform EVRYTHNG. He sees it as his mission to help CPG companies maximize “product ARPU” or average revenue per user attributed to ownership of a packaged product. We had never heard the term before in this context. Packaged products are typically sold outright, and no one expects them to produce revenue over a lifetime. So it got us thinking: As CPG products inevitably become “smart” and “connected,” the metrics we use to measure success in these industries will shift. In essence, they will start to look similar to the metrics we use to measure success in, say, a SaaS business.
As software “eats” CPG, we will use product ARPU to measure how much revenue a company is getting from each user of a product they are selling over that product’s lifetime. As brands acquire the capability to measure how a user interacts with each product, they will be able to track MAU (monthly active users) and DAU (daily active users), just as app makers do. Finally, brands will begin to look at the product LTV/CAC (the ratio of customer lifetime value to customer acquisition cost) to gauge how effective marketing spend is at deriving additional value from each product sold.
For CPG businesses and brands, this transformation in metrics will put data at the heart of every decision. As we’re already seeing, these businesses look more like software companies in how they’re run internally, in the types of talent they need to hire, and in how they’re evaluated by the investment community. For consumers, the IoT revolution, handled deftly, will provide a better customer experience at every step. Products will become more personalized and more easily controllable, with provenance information accessible with the scan of a smartphone. And we’ll see a convergence of physical and digital identities of products and associated customer relationships.
We’re only beginning to glimpse the massive changes for CPG on the horizon. Eventually, every one of these businesses – or, at least, those that survive – will become technology companies, and their most valuable commodity will be data. As such, the metrics we use to measure their performance will change.
Vinay Iyengar is an early-stage investor at Bessemer Venture Partners, where he focuses on frontier technology and machine intelligence. He also conducts research in Harvard Business School’s Entrepreneurial Management Unit. Previously, he was an investor with Clayton Christensen’s Rose Park Advisor, leading the firm’s exploration of machine intelligence as an enabler of disruption. Prior to entering the venture world, he cofounded a Harvard Innovation Lab-backed enterprise software startup and spent time as a quantitative trader at Goldman Sachs and a software engineer at Intel.
Jeffrey F. Rayport serves on the Faculty of Harvard Business School in the Entrepreneurial Management Unit, where he teaches in both the MBA and Executive Education programs. He is the author of several MBA-level textbooks on strategy in the networked economy and published the bestselling book Best Face Forward with Harvard Business Review Press. Prior to HBS, Jeffrey was an Operating Partner at private equity firm Castanea Partners, co-founded Marketspace, a digital strategy firm, and was a Senior Partner at Monitor Deloitte.