Blue Ocean Strategy Basics - Noncustomers

Blue Ocean noncustomers aren't just new customers; they're a new type of customer.

It’s your first week of MBA school. You’re excited, psyched, and vaguely hungover. A professor walks to the front of the class and asks “should you focus on existing customers or new customers?”

Every hand in the room shoots up.

“Anyone knows the answer to that!” answers George, a tall strong guy from central casting. “It’s always better to sell to your existing customers.”

In a normal world, give George an apple and an internship. Countless articles recount how much more profitable it is to sell to existing customers than to find new customers.

“Don't Spend 5 Times More Attracting New Customers, Nurture The Existing Ones,” reads an article from Forbes.

“The Value of Keeping the Right Customers,” reads another from Harvard Business Review.

Normally, this is a perfectly acceptable answer. You have a relationship with your current customers. Unless you’re Comcast, they trust you and remain with you for a reason. Why waste time, energy, and money trying to find new customers instead of just selling more stuff to the existing customer base?

The reason, in blue ocean strategy terms, is that there are a whole lot more noncustomers than there are customers. Furthermore, those noncustomers might be open to an offering that is different, and more profitable, than those currently in the market might expect.

When marketers refer to converting new customers, they assume you compete for those customers with other competitors. This is one of the core postulates of Michael Porter’s competitive theory, that the five forces in an industry all compete.

And yet, blue ocean strategy shows us a better way. Don’t compete: make your competition irrelevant by finding new customers, noncustomers.

The easiest case to illustrate the power of noncustomer case is the Nintendo Wii.

Repeating, briefly, there are three videogame console makers, Sony’s Playstation, Microsoft’s XBox, and Nintendo. In the mid-aughts, Nintendo was far behind Sony and Microsoft. Analysts said their competitive position was hopeless and suggested they not release a new console, opting instead to transform into a gamemaker for other gaming systems.

Instead, Nintendo used blue ocean strategy to create an entirely new type of game console, the Wii, and blew away the other two in sales. For two years, an eternity in console sales, Nintendo’s Wii outsold Sony and Microsoft combined.

How? By using value innovation to focus on noncustomers.

I won’t go into a detailed analysis of Nintendo’s blue ocean case (though I’ve published one, available at Harvard Business School Publishing). But I will focus on the use of blue ocean noncustomers.

There are three “tiers” of noncustomers plus the existing customers.

Nintendo didn’t ignore existing gamers but also didn’t let them box the company in a strategy. Traditional gamers purchased a Sony or Microsoft system, and also purchased a Wii.

First-tier noncustomers are those who were about to jump ship. In the case of Nintendo, it was boys who were playing the Game Cube. Normally, those boys would grow up then buy a more “serious” Sony or Microsoft console.

Second-tier noncustomers are those who seem like they should be in a market but aren’t. Typically, second tier noncustomers are the most likely to build your blue ocean. In the case of Nintendo, second-tier noncustomers included girls (who, until then, gamed far less than boys), young adults, and parents. All those categories of people played games; they just, at the time, didn’t play videogames.

Finally are third-tier noncustomers, those in distant markets. These are the people you’d never think would be interested in an offering no matter what you did. In the case of Nintendo, they famously spent considerable time interviewing elderly people in nursing homes, a classic Tier 3 noncustomer group.

Typically, strategists don’t intend to sell to Tier 3 noncustomers. Instead, they learn from them to create an offering more attractive to Tier 1 and Tier 2 noncustomers. In Nintendo’s case, they learned that elderly people in nursing homes play games all day. More specifically, these games have relatively easy-to-understand basic rules making them approachable for beginning but scaling to being mind numbingly complex for advanced players. Consider Chess, Bridge, and Go. None of these games has especially complex rules but they’re all far more complex than any traditional videogame when played by experienced players.

This insight, about simple-to-approach games that scale in complexity, led to the notion of casual games, games that anybody could play but that became increasingly difficult as a players skill increased. Countless analysts have focused on the technology behind the Wii, which was important — the motion-controller made the system especially easy-to-understand — but the casual games the system played was the real secret sauce behind Nintendo’s success.

The idea of noncustomers is one of the most misunderstood components of blue ocean strategy. I’ve all too often seen it approached as a marketing strategy to loop in more customers or to poach customers from a competitor, which isn’t the idea at all. Rather, the point of noncustomers is to redefine the rules of the game, to change the boundaries of an industry in blue ocean terms and to make competition irrelevant.