Idea in Brief
The Assumption
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.
The Reality
Even when customer data does confer a competitive advantage, it gives rise to network effects only infrequently. And that advantage may not last.
The Solution
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.
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.
