Managing Customer Heterogeneity for Competitive Advantage

This content relates to : NEW PRODUCT & SERVICE DEVELOPMENT

HIGHLIGHTS

Customer heterogeneity (CH) is a resource that can provide an important source of innovation-based competitive advantage.

To achieve this advantage, managers should understand the multidimensional nature of CH, i.e., recognize that CH includes customer need heterogeneity, customer knowledge heterogeneity, and customer relationship heterogeneity.

Because each customer heterogeneity dimension generates innovation related paradoxical tensions, firms need to develop dynamic capabilities to resolve and manage these tensions.

Gerard Athaide

Loyola University Maryland

Customer heterogeneity, i.e., differences among customers (business firms, consumers) can be an important source of innovation-based competitive advantage. Diverse customer needs and preferences offer firms the opportunity to target niche market segments whose needs were hitherto neglected with innovative product offerings. Traditionally, customer heterogeneity (CH) was often viewed as a challenge because it required firms to eschew standardization strategies and consequently increased the complexity of decision making. Against this background, this paper surveys extant literature to further understand three questions: (1) What are the various dimensions of customer heterogeneity?, (2) What are the antecedents and outcomes of CH?, and (3) How can CH be managed for innovation-based competitive advantage? 

With respect to the first question, the authors note that historically customer heterogeneity has been conceptualized primarily as differences in customer needs and preferences, i.e., customer need heterogeneity. However, recent perspectives suggest that two additional dimensions of customer heterogeneity are also relevant, i.e., customer knowledge heterogeneity and customer relationship heterogeneity.  Knowledge heterogeneity refers to differences in customers’ knowledge levels regarding how their needs can be satisfied while relationship heterogeneity reflects differences in customers’ propensities to engage in relationships with firms. 

In regard to the second question, the authors note that customer characteristics (e.g., demographics and psychographics), social comparison behavior, and changes in customers’ value perceptions are important antecedents of need heterogeneity. Antecedents of knowledge heterogeneity include customers’ resources and capabilities while prior relationships and reciprocity are key antecedents of relationship heterogeneity. With respect to outcomes, extant literature highlights product-related (e.g., new product diffusion), firm-level (e.g., financial performance), and customer-level (e.g., customer satisfaction) as important consequences of effective CH management. 

The authors propose that managing CH for innovation-based competitive advantage requires (a) recognition and (b) resolution of the paradoxical tensions associated with each CH dimension.  For example, while need heterogeneity presents firms with an opportunity to target new market segments via customized product offerings, the costs of customization may outweigh the benefits. Consequently, it presents managers with a standardization vs customization dilemma. Effective recognition and resolution of such paradoxical tensions requires firms to build dynamic capabilities, i.e., the ability to reallocate and reconfigure organizational resources to address environmental changes. 

Author:

Gerard Athaide, ’95 Ph.D.

Professor of Marketing, Sellinger School of Business, Loyola University Maryland

https://www.loyola.edu/sellinger-business/academics/departments/marketing/faculty/athlaide

To learn more, read: 

Amali Wijekoon. Sandeep Salunke, and Gerard A. Athaide (2021), “Customer heterogeneity and innovation-based competitive strategy: A review, synthesis, and research agenda,” Journal of Product Innovation Management, 38 (3), 315-333.