How AO.com underwent a customer-led transformation to become a £1bn success story

AO.com, a start-up online retailer selling white goods, grew to a valuation of more than £1 billion in 15 years, propelled by a number of bold ‘moments of belief’ that transformed the company into a big customer-led, outside-in success. A moment of belief is a commitment to a customer-led innovation that unmistakably signals to the organisation the leadership’s belief that being customer-led leads to business success. They’re crucial to a customer-led transformation.

Founded in 2000 by entrepreneur and salesman John Roberts, AO.com started with quite a basic customer-led premise – better prices. Roberts saw an opportunity in the growing world of online retailing, and he believed, controversially at the time, that big ticket items such as fridges and washing machines could be sold over the internet as easily as CDs and books. In the early days, when most felt this couldn’t be done, AO allowed its intrepid customers to save 35–40%. But as the idea of ecommerce took off, Roberts realised he didn’t have an advantage that would last.

As a hugely ambitious character, he brought his own version of what we call 'burningness' to the challenge. Burningness is a pre-condition required to make the switch from a natural ‘inside-out’ mentality to one that is unnatural, customer-led and ‘outside-in’. Whether through pain, fear or ambition, to put the fire out, the current approach won’t work. This flips the risk. Usually, the status quo is safe and doing something very different is a risk. But if you’re on fire then carrying on as you are is madness, and doing something boldly different becomes the only sane thing to do.

Roberts knew how competitive the white goods sector was, with powerful and ruthless physical retailers. He knew online retailing in general was low margin and tough. He had palpable fear. He responded by deciding that his business had to be more than just a little bit better than the alternatives. Unless he built something exceptional, he would be crushed, so from the start, there was boldness even if there wasn’t yet much sophistication.

Although AO had early traction, its brand was unknown. Working with big names, providing a white labelled service for its customers, looked like a route to accelerating growth, and Roberts worked hard to attract partners. In the end, both Boots and Sainsbury’s proved keen to enter the category without the risk of setting up their own operations.

There were still challenges. Before allowing sales to start, Sainsbury’s insisted service be delivered their way, formalising the approach with clear procedures and rules. Because AO had only one service team, this new approach was applied to everything including AO’s own brand customers.

The structure brought some benefits – not only were customers happy but, to Roberts’ surprise at the time, it was a route to reducing costs as well. By having better ways of handling customers’ problems, he discovered much more quickly what his customers’ problems actually were – and they were costing him money. So, he fixed them. And as he worked through these problems, complaints diminished and demand rose. Better service might look like it costs more, but in fact, it costs less eventually. Not only that, but also because customers are happier, they leave positive comments, recommend to others and growth accelerates.

All was going well  –  and then Sainsbury’s gave Roberts six months’ notice. They wanted to move their business to Comet, which was prepared to offer what Roberts viewed as an unsustainable level of commission. ("They got worse service when Comet went bust," he noted wryly.)

In a race against time, Roberts and the team transferred all of the lessons from selling for Sainsbury’s into their own AO-branded approach. By the end of the period, AO’s sales were higher and their service better than had been the case through Sainsbury’s.

Although Roberts had learned a first lesson about customer-led success, he still knew that being good wasn’t enough. AO had to be exceptional to survive. The original burningness was just as strong but now he had some ambition as well. His belief, and that of the people around him, had shifted, altered by the first moment of belief on their journey, provided by Sainsbury’s, that better service was better for the business too.

Now he searched for more ways to be exceptional, placing customers front and centre.

Making logistics part of the customer service proposition

His next big moment of belief was around a customer insight that with hindsight sounds obvious (many customer-led examples do). A fridge or a washing machine breaking down in most households constitutes a minor emergency. Suddenly a high-cost decision needs to be made fast and the value of getting a working replacement up and running is huge.

Roberts knew that the industry had an inside-out mentality – they got by with low-cost distribution, relying on suppliers to provide stock and third parties to deliver. But with suppliers supporting multiple retailers, AO could never be certain what was available for immediate dispatch. Similarly, having haggled the price down, the delivery service was pared back, making it unreliable and not especially friendly either.

Roberts made a big bet. His belief was that being able to offer next-day delivery on the whole AO white goods range would be a breakthrough, a proposition that would be hard to match. He invested in AO’s own warehousing, AO’s own stock not shared with any other retailers, and the acquisition of a warehousing and delivery operation called Expert Logistics. This meant AO could offer bulletproof rapid delivery for the first time to customers, promising that every product listed could be in the customer’s home the following day, wherever in the UK they lived.

David Wilkinson, at the time trading and purchasing director (and formerly Roberts’ boss in pre-AO days), explained: "Up to now our logistics providers had been mis-aligned. While our priority was wowing customers, theirs was the P&L. At last the model could be integrated. We identified a logistics company that sounded like they had pride in customer service. Once we bought them, we had total customer ownership from order to receipt. Manufacturers were so impressed that they started using Expert Logistics (now AO Logistics) for home deliveries to consumers on behalf of other retailers. Now there was competitive advantage behind being better – we used it in relentless weekly meetings to improve our deliveries. Our customers were very happy."

The delivery teams enjoyed their sense of purpose too, being on a mission to get their customers’ orders to them when and where they wanted, come what may. Today, there are many AO tales of mythical proportions, from delivering a washing machine to a customer on an island using a rowing boat to persuading a mechanic driving a recovery vehicle to tow a broken-down AO van with its customer’s cargo to its final delivery.

Helping customers make the right choice, first time

The next big moment of belief saw AO offering its customers free returns for any reason at all for 100 days after purchase. Roberts’ long-suffering CFO, subsequently CEO, Steve Caunce, was sure that this time Roberts had gone too far. The business could be bankrupted by customers borrowing washing machines at no cost – the cost and risk seemed out of all proportion to the benefit. And yet … it turned out that customers could be trusted and once again hidden value emerged after taking the leap.

It transpired that there were only two big reasons why customers returned products – they were damaged, or they’d bought the wrong one. Customers appreciated the no-quibble spirit with which they were replaced or refunded and relieved to be able to sort it out without a lot of arguing.

The value for AO came from this discovery. It meant they could systematically iron out all of the reasons why products were damaged in transit, and they could also learn how to make it easier for customers to choose what was right for them first time. The customer and the business very often have aligned interests if the set-up is outside-in – win-win – where success is defined as being good for the customer, not win-lose where success is the money made from an individual transaction and what it costs the customer.

The fourth moment of belief on AO’s journey was perhaps the most culturally significant – giving AO’s customer service teams complete freedom to do what they felt was right in sorting out customers’ issues and to look for ways to be memorable and thoughtful too.

Roberts certainly felt this was the most crucial – others could eventually copy next-day delivery or a 100-day guarantee, but if he could instil a genuinely customer-led set of beliefs in the way the business operated, then he knew that would be all but impregnable. He simply couldn’t imagine his inside-out competitors ever being able to copy this way of thinking.

Roberts summed up his intentions in a way that would be instantly understood by the frontline teams. "Treat the customer as if she was your gran but then after the call you need to explain what you did to your mum." That was his human way of asking people to put customers first but not at any cost.

Because he trusted them – the frontline teams no longer had to ask supervisors for permission – they took responsibility. Roberts had effectively stripped out layers of management from his customer call centres. In his language you’d have to give away a lot for free before costs were higher than the layers of management he wasn’t paying for. Moreover, this new approach meant that 95% of customer issues were dealt with immediately and usually with a warmth and character that customers loved.

Here was another big investment for the company that was unnatural but that worked. It clearly demonstrated outside-in beliefs to customers and, even more importantly, to colleagues as well. The string of moments of belief showed that being customer-led also meant winning big. In 2014, AO listed on the London Stock Exchange, valued at more than £1 billion with John Roberts’ share valued at more than £400 million.

The Customer Copernicus: How to be Customer-Led by Charlie Dawson and Seán Meehan is published by Routledge, priced £26.99, available from Amazon and leading international booksellers.