(FORTUNE Magazine) – Want to be sent L.L. Bean catalogues that peddle only fly-fishing gear? You got it. Need Federal Express to bill you electronically every Thursday? No problem. Like your Levi's custom-made? Coming right up. What these and other topflight companies are doing is part of a relatively new and growing trend called mass customization. In theory, it means giving each customer--even if you have masses of them--whatever he asks for. Doing that, the management pundits argue, will keep him yours for life. And they're right. But many managers, not fully understanding how mass customization works, end up providing services that can cost your business more than they're worth.

While we're all struggling to master this new management tool, there are some basic principles that seem to work. At Oxford Health Plans, our Connecticut-based HMO company, we use mass customization in two fundamental ways: to give our 800,000 members and thousands of doctors the kind of individualized service that will make them ours forever, and as a tool for identifying new business opportunities.

The first step toward mass customization is to constantly interact with your customers--learning what services they want, modifying or adding new ones--and then keep the loop going. For example, our computer system alerts our employees whenever one of our members is pregnant. Right away, an Oxford nurse telephones the pregnant mother and assesses what she might need. If she's a diabetic, we tell her about a special program of treatment. This service not only delights our customers but is also smart business. The better informed the mother is, the more likely she is to bring a baby to full term and avoid the high costs of a premature birth.

Not all our customization efforts are so successful. A few years ago Columbia University Medical Center, one of our customers, allowed us to set up a special Oxford office on their premises to handle claims and answer questions. It ended up costing us too much because we didn't get economies of scale. What we learned from that experience is that one of the keys to efficiency is self-service. Customers are willing to help themselves as long as it saves time and gives them what they're looking for. In Columbia's case, instead of setting up an office, we might have placed an electronic kiosk there, a new service we're now offering many of our customers. By installing a kiosk in, say, a benefits office, we can give our customers the service they want--finding out about a doctor's credentials, getting identity cards, knowing where to file a claim. It saves us lots of phone calls, office rent, and money.

These strides in service are important, but we often overlook perhaps the most crucial use of mass customization--as a way to reinvent our business. For a long time now we've known that every company goes through a life cycle, from startup to rapid growth, then into maturity and decline. What's new is that the cycle's time frame, which used to be ten years or more, is now two years or even less. Companies simply don't have much time before they have to reinvent themselves.

If you're doing mass customization and you're constantly talking to your customers, before long you'll find that diamond of insight, that gem that jumps out of the conversation, and all of a sudden you're thinking of your company's future differently. During our drive to mass customization, we discovered that our doctors were looking for new ways to succeed in managed care. Many told us they wanted to keep their small private practices but didn't have the staff, technology, or business savvy to compete with large medical groups. So we began organizing virtual networks of doctors that we call Private Practice Partnerships. Today we manage 70 such groups composed of anywhere from 15 to 40 doctors. Another business was started to provide the doctors with financing and technology, and even do their billing.

One thing I've learned doing mass customization: Your job as a leader is to liberate your employees--to make sure they feel free to take what customers say and put it to good use. Afraid of changing the status quo, people will give you lots of reasons for not doing something. In the song "Me and Bobby McGee," Janis Joplin sings: "Freedom's just another word for nothing left to lose." The irony is, if you don't take those risks, in the end you'll lose it all anyway.

Stephen F. Wiggins is the founder and CEO of Oxford Health Plans, one of the fastest-growing HMOs in the country.