Andrei Hagiu

Julian Wright

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 <h4 class="ideainbrief-title">Idea in Brief</h4>
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  <h5>The Assumption</h5>
  <p>Companies can build winner-take-all positions by collecting and analyzing customer data. The more customers a firm has, the more data it can gather and mine; the resulting insights allow it to offer a better product that attracts even more customers, from which it can collect still more data.</p>
  <h5>The Reality</h5>
  <p>Even when customer data does confer a competitive advantage, it gives rise to network effects only infrequently. And that advantage may not last.</p>
  <h5>The Solution</h5>
  <p>To understand the edge that data-enabled learning can provide, companies should answer seven questions, which examine the value of the data; whether its marginal value drops quickly; how fast it becomes obsolete; whether it’s proprietary; whether the improvements from it can be easily imitated; whether they enhance the product for current users, other users, or both; and how fast insights can be incorporated into products.</p>
 </div>
</article-ideainbrief><p>Many executives and investors assume that it’s possible to use customer-data capabilities to gain an unbeatable competitive edge. The more customers you have, the more data you can gather, and that data, when analyzed with machine-learning tools, allows you to offer a better product that attracts more customers. You can then collect even more data and eventually marginalize your competitors in the same way that businesses with sizable network effects do. Or so the thinking goes. More often than not, this assumption is wrong. In most instances people grossly overestimate the advantage that data confers.</p>

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<p>Many executives assume that customer data can give you an unbeatable edge. The more customers you have, the more data you can gather, and that data, when analyzed, allows you to offer a better product that attracts more customers. You can then collect even more data, repeating the cycle until you eventually marginalize your competitors. But this thinking is usually wrong. Though the virtuous cycles of data-enabled learning may look similar to those of network effects&#8212;wherein an offering increases in value to users as more people adopt it and ultimately garners a critical mass of users that shuts out competitors&#8212;they are not as powerful or as enduring.</p>
<p>Nevertheless, under the right conditions, customer data can help build competitive defenses. It all depends on whether the data offers high and lasting value, is proprietary, leads to improvements that can&#8217;t be easily imitated, or generates insights that can be quickly incorporated. Those characteristics do give firms an advantage. And when learning from one customer rapidly improves an offering for others (think Google Maps), people will care about how many other people are adopting it, and it will enjoy those sought-after network effects.</p>

When Data Creates Competitive Advantage

Many executives assume that customer data can give you an unbeatable edge. The more customers you have, the more data you can gather, and that data, when analyzed, allows you to offer a better product that attracts more customers. You can then collect even more data, repeating the cycle until you eventually marginalize your competitors. But this thinking is usually wrong. Though the virtuous cycles of data-enabled learning may look similar to those of network effects—wherein an offering increases in value to users as more people adopt it and ultimately garners a critical mass of users that shuts out competitors—they are not as powerful or as enduring. Nevertheless, under the right conditions, customer data can help build competitive defenses. It all depends on whether the data offers high and lasting value, is proprietary, leads to improvements that can’t be easily imitated, or generates insights that can be quickly incorporated. Those characteristics do give firms an advantage. And when learning from one customer rapidly improves an offering for others (think Google Maps), people will care about how many other people are adopting it, and it will enjoy those sought-after network effects.

When Data Creates Competitive Advantage

Summary.

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