Internet Retailing: The Path to Customer Centricity
Michael Ross, Co-founder and Chief Scientist of DynamicAction, wrote a guest article for the UK trade publication, Internet Retailing Magazine. The Path to Customer Centricity illustrates how retailers can truly make customers the center of their business and transform their organizations beyond a superficial veneer to focus on profit. Ross lays out the four main pillars essential to shifting internal dynamics: insight, planning, trading and reporting, along with accompanying graphics.
The Path to Customer Centricity
by Michael Ross, Co-founder and Chief Scientist of DynamicAction
Almost all retailers are talking about transformation in their business, but their approaches are alarmingly inconsistent: multichannel, omnichannel, data-driven, mobile-first, digitally-led, customer-centric, and more. In many cases it’s just a veneer – transformation on the outside – but scratch beneath the surface and not much has changed. The reality of managing a truly customer-centric business has to cut deep into the entire organisation. At the heart of it should be a new customer-centric operating model. This article explores which critical aspects of the business need to be thought about differently and explains what that can mean in practice.
Think Differently to Grow
In the past, retail decisions were aligned to stores and products. Customers were obviously important, but stores were a proxy – an aggregation of local customers. And store like-for-likes were a good measure of overall performance and customer relevancy. Customer actions were left to the CRM team, if one existed, and mostly consisted of broadcasting promotions.
Today, digitally-enabled consumers have changed the fundamental economics and dynamics of retail – consumers have been unshackled from the geography of stores. As the share of online penetration and influence has increased, online cannot be regarded as ‘just another store.’ The new reality becomes clear when retailers reach the tipping point of having negativelike-for-likes but increasingoverall revenue: the traditional “four walls” view of retail performance no longer works.
Retailers need to pivot their focus from stores to customers.Almost everything is different in the customer-centric, data-rich, digitally-driven retail world:
- New revenue drivers (customer acquisition and retention)
- New variable marketing costs (cost per click, visit, transaction)
- New variable per-order costs (picking, packing, packaging, delivery, returns)
- New digital levers that allow retailers to take surgical actions (at customer, SKU, session level)
The Four Pillars of Change
It is the combination of these dynamics that requires retailers to change their approach to insight, planning, trading and reporting.
New Insights on Customers
Retailers have always used the drivers of the P&L to understand their business – traditionally by geography, store, category, brand or store format, with actions aligned to these same drivers. But retailers now have data at a customer level, can understand customer profit and can take action at a customer level.
Customers are not equal – some matter more than others – and it is crucial for retailers to understand the profit and potential profit of every customer. A customer decile analysis brings this into sharp focus and highlights the fact that most retailers are actually running two very different businesses – the average customer does not exist:
- The top 5-10% of loyal customers who will typically make up 50% of revenue and 80% of profit. They shop regularly, pay full price and are brand loyal
- A long tail of transactional customers
Customer Decile Analysis
To be truly customer centric, you need to imagine a customer P&L – for every customer, know what are the actions that will drive incremental profit and what is the ROI for different types of actions. What are the characteristics of high and low value customers? Which products and brands acquire and retain high value customers? What marketing acquires and retains high value customers? Who are the low value but high potential value customers? What actions drive incremental customer LTV?
It is also critical to make sense of the “digital exhaust” – the torrent of data from an individual customer’s browsing, searches, product views, basket adds, email clicks and marketing exposure. This data is vital to understand the customer’s intent and engagement to ensure that CRM actions are personalised, and retention investments are commensurate with the customer’s churn risk and potential value.
A Lesson from Amazon
Amazon has mapped each stage of the customer’s journey to understand the incremental lifetime value (LTV) of each step – for example: making the first purchase, making a purchase in a new category, signing up for Prime, buying an Alexa device, browsing a new category, buying a Kindle… Amazon has modelled the incremental LTV for each of these High Value Actions (HVAs),which is effectively a “common currency” for managing a customer-centric business. This approach allows every decision and action to be overlaid with the customer LTV lens.
New Customer-Centric Plans
It is fundamental for retailers to set an achievable business plan. In the past, retailers’ growth was driven by simple math: same-store sales growth and new stores. However, many retailers are now going wrong because they set an overly ambitious revenue trajectory, buy inventory to this plan, then find themselves behind plan and overstocked. They run promotions to get back on track, which not only kills margins, but also trains customers to expect discounts.
The Retail Spiral to Avoid
The key to success is to build a customer-centric business plan
- Project revenue from the existing customer base.
- Determine the number and type of new customers required to hit plan.
- Triangulate with category, channel and marketing plans.
At the core of this new model is an explicit growth versus profit trade-off: accelerating customer acquisition can reduce profits in the short term but drive long-term growth; alternately, dialling down customer acquisition will have the opposite effect….