Saturday, June 02, 2007

Thoughts on Retail Transformation. Part 1

In the selling environment, retailers are primarily focused on the following four success metrics. There are more than this obviously but for the sake of discussion, let's keep it to these four:

Conversion Rate:
Every retailer has a focus on Conversion Rate, the number of browsers that convert to purchasing shoppers. Anything that can be done to increase Conversion Rate is positive but there is a metric that can diminish the positive effects of Conversion Rate and that is Return Rate. (Higher % is better.)

Attachment Rate: Also called “bundles”, these are the things that go with the thing you are buying. If you buy something on you will see something in the checkout process that says, “People who bought (insert: what you are buying) also bought (insert: list of associated products). Retailers like to increase the
Attachment Rate because it increases Average Order Value. (Higher % is better.)

Average Order Value: This is when a retailer looks at the average of each customers checkout amount. This is typically used to chart trends, is Average Order Value going up or going down? (Higher % is better.)

Return Rate: You can sell 100 units of a product and 50 are returned by your customers (a 50% Return Rate) your net profit starts diminishing quickly. Years ago in New York a clothing retailer named Sy Syms launched a tagline that declared, “An educated consumer is our best customer”. This concept can be taken to heart by today’s retailers no matter what industry you are in. Costco recently started selling televisions in their stores but two forces worked against them; television are now increasingly complex to install, they are no longer the plug-and-play units they once were. Additionally, Costco didn’t have the “resident experts” sales force to support such a complex purchase so people bought them, got them home, couldn’t get the things to work and promptly returned the purchase. Costco’s return rate was so high that they considered getting out of that business altogether. (Lower% is better.)

Customers generally go through a relatively simple decision process and the best retailers continue to worked hard to facilitate this process. (See diagram below).

Remember, this is just the customer decision process at retail, there is much more that happens before they get to this point but let's look at this. The customer will say,
"I bought the best television with the cables that I needed, the DVD player that I wanted, but I didn't need the speakers." If we diagramed that it would look like this:


Social Shopping, from a retail point of view has some benefits and some risks. The benefits include the fact that online social shopping is really an extension of the “customer self-service” concept that guides customers to cheaper, more efficient modes of interaction. ATM’s, online bank statements, and self-serve restaurants are all good examples of customer self-service. But there are risks in this strategy. While expenses may be driven down, customers may be driven off if they do not feel supported in their shopping experience. And customers that do not feel supported in their shopping experience simply leave. There are too many other options available to them, sometimes with just the click of a mouse.

Increasingly customers do not trust sales associates, instead turning to the wisdom of crowds, sometimes complete strangers to solicit advice on products and services. Somewhat astonishingly, one or two positive reviews from someone who has bought the product carries more weight with the consumer than all the marketing materials the company has produced. This is a dramatic and profound change in sales and marketing. It is no longer what a company says it is that is most important, it is what all the other customers say that is most important.

It has often been said that, “Control is an illusion” and this is the reality facing retailers today. The old marketing plans and programs no longer work the way they once did and that is best evidenced by the prominence of Google in the marketplace. Slow-to-react and atrophying advertising agencies have watched Google fly past them as Google offers marketers targeted, quantifiable information that, mark this, the customer actually really, truly wants! When was the last time you actually wanted a TV commercial?
The takeaway is that the sales and marketing dynamic has radically shifted and the power is firmly in the hands on the consumer.

The wise and ultimately successful retail sales and marketer will embrace this change and employ every tool and initiative that guides and supports consumers in their purchase decision process.

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