How Mass Customization Creates More Value
Author: Carmen | March 29, 2010 | Customization[This was posted on Carmen's mass customization blog a few weeks ago]
I would like to make a point here that mass customization increases the value produces in the creation and purchasing process.
Let’s take Spencer, consumer A, and Valerie, consumer B. Spencer loves, loves, loves chocolate with sea salt. Nothing else, just dark chocolate with sea salt. Yummy. Valerie however, dreams of a chocolate bar with salt, bacon and cashews. Let’s pretend for a minute that chocri hasn’t been invented yet. Valerie is out of luck - no such chocolate bar exists!
The picture below describes this situation with more theoretical terms. Spencer pays a certain price for his dark chocolate with sea salt (hint: Lindt makes that, it’s not bad at all), the price covers the producer’s cost and profit. However, to Spencer this is the chocolate bar of his dreams, so he actually gets much more value out of the bar than he pays - so he experiences a so-called “consumer surplus” - think of it as a consumer’s profit.
Value creation of an ordinary mass product
Next to Spencer’s chart is Valerie. Poor Valerie has to do with dark chocolate and salt, when she would much rather have another chocolate bar. She still likes it though, and needs her chocolate. Thus she is still willing to pay the price of the bar, but the value she derives from it is barely above it.
Value of a mass product for different consumers
So, in summary, for Spencer (consumer A), the mass product is just fine, whereas Valerie would get more value out of a chocolate bar that doesn’t exist.
In comes mass customization With chocri for example, everyone gets the chocolate bar of their dreams, everyone gets their needs met like Spencer did, so from an average consumer surplus of itty-bitty (see picture below), the value for the consumer increases
Value created and consumed increases with mass customization. Additional value is distributed on increased costs, profits, and consumer surplus.
In the mass production world, lots and lots of innovation and market research goes towards finding out what most consumers want (to get the “mass” into mass production), but that always means that not everyone is as happy as they could be if they could just create what the really want.
With mass customization, everyone does get what they want. The costs to produce those goods are typically a little higher, but not as much as with old-school customization -there’s still the beauty of a scaling effect. The additional value that mass customization created (see picture) is shared by the suppliers & employees (more business, work, purchases), producer (more profit) and the consumer (more surplus). It’s a win-win-win solution. Or really what it is, is removing inefficiencies in the market. In an ideal world, everyone would be able to purchase exactly what they need and want, and pay the price that corresponds to the value they place on it. Price differentiation is an answer to that, but can’t be applied to everything, and before mass customization, it was just impossible to purchase “exactly” what you want.
Now, I’ll have to be fair - mass customization is still in baby shoes - there aren’t enough players in the market yet to achieve “exactly” what you want. And: We don’t have lavender in our toppings list - choices within mass customization are still somewhat limited. And there’s still Spencer, who couldn’t care less about a salty chocolate bar with peanuts and bacon, since his demand is already fulfilled. But there are many needs that are not perfectly fulfilled, and as the mass customization industry grows and becomes more efficient, this model might soon become the norm. And with the removed inefficiency of unmet needs in a mass production industry, the value created in a market, in a society, in the world - will be increased. Too bad consumption itself doesn’t really make us happy… unless it’s chocolate! :)
