Marketers used to succeed by providing superior products and other distinctive functional benefits. Today this is no longer enough, for such benefits can readily be imitated; in the automobile industry, for instance, quality and performance increasingly meet—and are perceived by consumers to meet—uniformly high standards (Exhibit 1). Today’s marketers must therefore find new ways of differentiating their products and services.
The solution is to emphasize process benefits (which make transactions between buyers and sellers easier, quicker, cheaper, and more pleasant) and relationship benefits (which reward the willingness of consumers to identify themselves and to reveal their purchasing behavior). In other words, the basis for creating successful marketing strategies has expanded to three dimensions, from one.
McKinsey research on marketing in four industries—automobiles, cosmetics, credit cards, and long-distance telephone services—shows that many people have come to value these new types of benefit as highly as their functional predecessors, if not more highly (Exhibit 2). The implication: if your company doesn’t satisfy the demand for all three kinds of benefit in its value propositions, it will be vulnerable to competitors that do.
Our research also shows that consumers can be segmented by all three dimensions of benefit to create more complex and powerful maps of preferences. The size and nature of the important clusters vary substantially in the four categories we studied (Exhibit 3). Only in automobiles did we find a true "want-it-all" cluster, and this may reflect the fact that autos are a high-ticket purchase. Otherwise, different people seem to want different combinations of the three kinds of benefit—a pattern we think characterizes many industries.
The ability of process and relationship benefits to transform the customer’s shopping experience is becoming more and more apparent. On the process side, look at Streamline, a grocery home-delivery service expanding into Washington, DC, from its base in Boston. Representatives of the company visit each client’s home to scan the products in the pantry and draw up a customized shopping list, including staples to be replenished automatically every week. Additional items can be ordered by telephone, fax, or the Internet, and they are delivered to a Streamline-supplied refrigerator installed in the customer’s garage, so that he or she need not be at home to receive them. Streamline also delivers prepared meals and videos and takes care of dry cleaning and film processing. The Streamline value proposition: "Life just became a whole lot simpler!"
People who take advantage of Streamline’s service might also avail themselves of the relationship benefits offered by American Express. Under the slogan "Membership has its rewards," it has countered the functional features of products from Visa and other competitors by pioneering benefits such as the instant replacement of lost or stolen cards and the elimination of preset spending limits. When the competitors imitated those benefits, too, American Express introduced its Membership Miles program, rewarding loyal customers with purchase points that can be used on a number of airlines. The program has since been extended to a wider range of relationship benefits, including special services, events, and programs; high-value customers, for example, get preferred seating in special American Express hospitality areas at major golf and tennis tournaments.
Saturn, a General Motors (GM) car division, famously offers both process and relationship benefits. It gave consumers greater control over the buying process by reducing showroom pressure and introducing no-haggle pricing. It forged individual relationships by welcoming purchasers into the "Saturn family," whose advantages include membership in owners’ groups and access to on-line information. Saturn owners thus feel they belong to a special club and even (according to the polling firm Yankelovich Partners) trust their dealers—a rare achievement for the least-trusted occupation in the United States. Our research found that Saturn customers mainly fall in the segment comprising people who value process and relationship benefits over functional ones. The new approach may well have helped Saturn sell roughly twice as many cars as a traditional GM division could have done with similar products.
Should other companies run out and add more process and relationship benefits to their existing offers? The answer is yes—but profitably. The most savvy marketers have fashioned hundreds of functional, process, and relationship combinations and identified a similar number of distinct consumer segments that might be attracted to them. Our research suggests, for example, that in the US credit card market alone, the number of segments has risen to more than 100, from 3 to 5 segments ten years ago. But any marketer that doesn’t know which customers value precisely which combinations of benefits or fails to use such information to eliminate unnecessary extras will be vulnerable to specialist competitors zeroing in on highly defined microsegments.
"De-averaging" relationships
The 3-D marketer’s answer is to "de-average" relationships with consumers. Specialist competitors get their opportunities because many companies still attempt to serve a range of customer segments with a common functional offering that leaves out benefits important to each segment while charging all customers for costly benefits valued only by some. Marketers taking a three- rather than one-dimensional approach can avoid this problem by segmenting customers more effectively and offering each attractive segment a customized 3-D offer.
American Airlines (AA) has shown how this approach can work. On the process benefit front, AMR, American’s parent company, attracts consumers through the Travelocity World Wide Web site (owned by AMR’s Sabre subsidiary), which gives travelers facilities for entering their itineraries and travel dates and then automatically finds available seats and prices on any airline, not just AA. American’s own Web site automatically customizes its interactions with users over time so that it focuses on the routes they like to fly. Different segments of customers—executives, vacationers, bargain hunters, and businesses that want to cut their travel costs or provide their employees with travel benefits—can assemble customized packages. The more you spend, the more personalized the service becomes.
On the relationship front, AA’s pioneering frequent-flyer program, AAdvantage, not only awards points that can be used toward free travel and upgrades but also offers discounts on car rentals, co-branded credit cards that accumulate points with use, assistance with travel planning, and other services strengthening the customer’s relationship with AA. Preferred customers receive call-center support designed specifically for them, expedited service at airports, even chocolate chip cookies at their homes during the holidays. Using a number of channels to provide at least five versions of the AAdvantage program to different customer segments, AA retains value propositions that flourish and drops those that don’t. Although competitors have established their own frequent-flyer programs, AA has continually innovated to stay ahead of the field. In this way, over the past eight years the company has won an impressive degree of customer loyalty, which has helped it earn a higher and more stable operating profit and cumulative return to shareholders than either of its main competitors, United Airlines and Delta Air Lines.
Three rules for marketers
Every leading company we studied follows three rules: build a 3-D opportunity portfolio; deliver it on a backbone of technology; and spend your funds where they work hardest.
Build a 3-D opportunity portfolio
The unique competitive conditions of a particular industry shape every 3-D portfolio. Yet one factor is universal: a new segmentation scheme based on the size and nature of clusters of customers who desire specific combinations of functional, process, and relationship benefits. (See boxed insert, "A toolkit for portfolio builders.")
Consider the credit card industry. Although competition has mostly emphasized functional benefits, innovative marketers have begun to offer a variety of process and relationship benefits as well. The most successful such company has been First USA, which from its initial public offering, in May 1992, to its July 1997 acquisition by Bank One generated a total return to shareholders of 2,000 percent, compared with 620 percent for MBNA and 257 percent for Standard & Poor’s diversified financial 500.
First USA has used alliances to develop more than 1,500 targeted, co-branded credit card offerings. These include the Professional Golfers’ Association Tour Card, giving avid golfers frequent discounts on golf merchandise, and the E*TRADE affinity card, which lets users present and pay bills on line through an E*TRADE account and provides free minutes at Internet portals. First USA also gives companies that market expensive items a consumer credit mechanism. Dell Computer, for example, can grant its customers instant credit in the form of First USA credit cards that may later be used with other vendors. Moreover, though most credit cards now offer such relationship benefits as travel reservations and car rental insurance, First USA goes so far as to provide premium customers with concierge services—for example, help in securing dinner or theater reservations, recovering lost luggage, and finding the lowest prices for many goods. Through this broad portfolio of offerings, First USA meets the needs of a wide spectrum of customer segments, each valuing a different balance of functional and relationship benefits.
Research shows that purchasers of cosmetics rate process and relationship benefits at least as highly as functional ones
The example of First USA shows what has been done to date but not what could be done in the future. Consider the opportunity 3-D marketing presents in the cosmetics industry. Quantitative research confirmed the idea that each of the industry’s distribution channels—mass, prestige, and direct—serves consumers who rate process and relationship benefits at least as highly as functional ones. That finding directly contradicted the traditional marketing belief that only customers of prestige brands in department stores value process and relationship benefits, while the customers of mass-market brands value only functional products at low prices. (See boxed insert, "Branding in 3-D.")
A 3-D opportunity exists to develop a mass-market brand with close-to-prestige levels of quality and service if cosmetics manufacturers can create process and relationship benefits that will substitute for the expensive beauty advisers who help them sell prestige brands in department stores. The idea would be to combine a high-quality product at midmarket prices (a functional benefit), personal Web "cyber-advisers" on Internet kiosks in drug and discount stores (a process benefit), and "cosmetics club" continuous-relationship marketing (CRM) programs based on individual buying histories built up by the cyber-advisers (a relationship benefit). The result? A new business opportunity that delivers substantially enhanced benefits to a large consumer segment and substantially reconfigures the economics of serving it.
Deliver the portfolio on a technology backbone
Providing 3-D value propositions to a number of consumer segments is complex and potentially expensive—something that could give a cost advantage to specialists targeting only individual segments. The key to managing this problem is technology, which progressive marketers use to learn what each customer wants and to "mass-customize" offerings to those individual needs, to identify and target the customers with the highest value, and to cut the cost of marketing, sales, and customer interactions dramatically.
Mattel’s Web-based personalized Barbie program, for example, offers 6,000 options permitting users to create their own customized choices—for a 100 percent price premium. Collaborative filters and pattern recognition software help Web companies such as Amazon.com and Yahoo! personalize their content. A less well-known business, the industrial soap producer ChemStation, manufactures a custom-blended product by analyzing a customer’s needs and then delivers it through a metered delivery pump into a tank supplied, monitored, and replenished by the company.
Leading marketers also use technology to find and serve that small group of customers providing much of a company’s profit. Office Depot creates customized on-line catalogs for its (very profitable) regular small-business customers. The account-tracking and customer service software of Wells Fargo helps it to focus on the highly profitable but underserved small-business segment and to offer companies in it rapid credit approval, electronic loan repayment, and other special services that propelled the bank from 11th to 1st in small-business-loan volume in only three years.1 Ford provides differentiated service for repeat purchasers of high-profit vehicles such as sport utilities and full-size pickups. Calls to the company’s 1-800 service line are sorted by customer value, and service representatives can bend the rules for high-value customers—for instance, by approving repairs after warranties expire.
The computer industry supplies the most frequently cited cases of technology’s ability to cut costs. Direct selling allowed Dell to reconfigure the manufacturing and distribution economics of the PC business. Cisco Systems saved upward of $500 million devoted to paper catalogs, the physical distribution of its software, and customer service by moving more than 80 percent of its help desk operation to the Web, where only 20 developers are required to do the job. (It takes 800 engineers to handle the other 20 percent!) When Compaq Computer transferred its small and midsize customers from resellers and in-house sales channels to on-line support and configuration, it projected savings of $200 million in marketing and sales costs.
Companies have long used new technology to cut the cost of their interactions with customers. Now, in addition to moving customers from labor-intensive to Web-based channels, cutting-edge companies are using the cost savings to win market share and take profits on higher volumes. E*TRADE’s low-cost trading model, for instance, attracts customers who trade six times more often than Charles Schwab’s.
Finally, don’t think that you have to wait until a massive new information technology system is in place. Leading marketers realize that they can begin their CRM campaigns long before that intergalactic database has been implemented and improve their service before their customer response systems have been fully integrated. A bias for action pervades the adopters of new marketing technologies.
Spend your funds where they work hardest
Effective 3-D marketing requires investments to flow efficiently into the areas where they could have the greatest impact. This involves two steps. Since a small fraction of a company’s customer base contributes a disproportionate share of the profits (Exhibit 4), the first is to allocate money on the basis of your customers’ current and potential profitability—not revenue. By identifying the profit potential and benefit preferences of different segments and shifting marketing expenditures to those with higher potential, one large retailer generated a 10 percent increase in profits (Exhibit 5).
The second step is to find the right 3-D spending mix. For many companies, this means a shift away from mass-media approaches and toward much more targeted communications vehicles. Take the automobile industry, which now expends huge sums on mass marketing. Since only 1 to 2 percent of the population is looking for a particular class of car at any time, network television and mainstream print campaigns are hopelessly inefficient. Why offer $1,000 rebates to everyone, including people who would have bought a car without them, if you can take advantage of mounds of data to predict which customers will actually respond to rebates and how large they must be?
No car company can afford to eschew the mass media just yet. But the industry unmistakably stands at the threshold of a transition. One major automaker is compiling robust customer profiles, including customer demographics, vehicle registration information, sales and service satisfaction surveys, vehicle reliability and service histories, and financing behavior. Its goal is to predict when a customer is likely to be in the market for a new vehicle, whether its brand or a competitor’s is the probable beneficiary, which segment the vehicle will belong in, and whether the customer will buy or lease. By taking advantage of predictive modeling techniques, interactive Web sites, customized print advertisements, and interactive television, auto manufacturers should be able to direct tailored offers to appropriate recipients. Investments in e-mail, interactive kiosks, and customer service and sales centers can also be expected to grow as manufacturers shift their investments into efforts to enhance process and relationship benefits (Exhibit 6).
Does adding these new communications media to the marketing mix imply that total spending must rise? Eventually, it should be possible to keep spending at current levels—or perhaps below them—while increasing the overall effectiveness of the marketing effort. But financing the passage from the old approach to the new will be tricky. Begin by systematically examining the efficiency of your current media expenditures: our experience suggests that they can be cut by 10 to 15 percent without significantly affecting performance.
The organizational challenge
Most marketing organizations will have to develop more flexible infrastructures and more fluid resourcing systems to identify and expand new 3-D opportunities. The two- to four-year planning horizons of deep-pocket brand-marketing groups simply are not appropriate for the rapid deployment of resources needed to build 3-D portfolios exploiting a range of opportunities. Moreover, companies must organize around such opportunities: separate groups focused on products or segments are not flexible enough; people with product, segment, and channel knowledge must all sit around the same table at the same time.
First USA, for instance, pulls together small, cross-functional "opportunity teams"—temporary, unconventional combinations of segment and product specialists, database managers, and representatives from R&D, operations, and finance that include more data miners and technology specialists than brand managers. Once a business is up and running, some people stay to maintain continuity; others move on. Managing a 3-D organization presents senior managers with new leadership challenges, such as how many opportunity teams can function simultaneously, how they should be constituted, and who should lead them.
We call the approach we recommend "venture marketing." Venture capitalists with demanding goals and limited time must place a number of bets, nurturing those that grow stronger while ruthlessly sacrificing the stragglers so that the resources they consume can be redirected to the emerging winners. Similarly, marketing leaders must rapidly turn on and off the flow of resources coursing through a number of programs that strive—some successfully, some not—to evolve in step with their target constituencies.
A new class of innovator is redefining marketing and unlocking enormous economic value along the way. This is not just an attacker’s game; the best incumbents are also applying these lessons to build new competitive positions. Don’t get left behind as a one-dimensional marketer in a three-dimensional world. 
About the Authors
David Court is a director in McKinsey’s Dallas office; Tom French is a principal and Michael Partington is a consultant in the Boston office; and Tim McGuire is a principal in the Toronto office.
The authors wish to thank all those who helped research, write, and edit this article. We give special thanks to Denis Beausejour, Ben Brake, Brian Fetherstonhaugh, and Steve Graham for their insights and support.
Notes