Turning shoppers into advocates : The customer focused retail enterprise

While retailers are heeding the daily drumbeat of pundits on the importance of focusing on the customer experience, a gap remains between what retailers are delivering and what shoppers expect. Retailers can close this gap by systematically integrating knowledge of whatb their best customers want and expect from their brand into every core operational decision. This is where the bar will be set for retailers to turn shoppers into advocates and create sustainably, differentiated advantage.

Unprecedented diversity, fragmentation of consumer values and information transparency have polarized the retail marketplace and created an imperative for all retailers to differentiate. In addition, the challenges of an increasingly price-driven world have raised the bar for retailers to create a shopping experience that builds loyalty to brands, channels and services and is not based solely on price. Certainly these messages are not new and many retailers are moving forward on their customer strategies and are gaining deeper insights into their core customers needs. But that is just the first step. The new dimension to be explored is how retailers can change the way they operate to create a satisfying and compelling experience. This is a transformational strategy that will enable retailers to turn shoppers into advocates customers who will recommend and promote the retailer to others, spend more of their wallet with that retailer and remain loyal over time. Retailers can develop advocates by becoming a customer focused enterprise and blending the customer perspective with a traditional product-centric approach. This new perspective will require retailers to build customer insights into their core business decisions such as merchandising, marketing, customer service, new product development, and store and channel operations to significantly change the day-today operations of the business.

We believe that retailers that are customer focused achieve greater customer advocacy, retention and loyalty, capture increased share of wallet and market share, develop deeper customer trust and demonstrate superior financial results. Becoming more customer focused is important for all retailers, regardless of value proposition. The pace of change in the marketplace will quickly make winners and losers. Leading retailers will move first to build strong bases of loyal, profitable customers who are also advocates of the company and achieve sustainable, differentiated advantage.Where will you be?

The new business model: The customer focused enterprise

What does being customer focused mean for retailers?

Several factors in todays retailmarketplace are driving the need for differentiation and customer focus. Retailmarket fragmentation and complexity are increasing, while boundaries betweentraditional segments continue to blur. In addition, the vast amount ofavailable information is raising the bar on what customers expect retailers toprovide in the shopping experience. To navigate the ever changing marketplace,successful retailers are placing customers at the center of their strategiesand operations and becoming truly customer focused. Retailers that are customerfocused embody four characteristics:

1. Deep understanding of the needs,shopping preferences and expectations of their best customers across all channels, touch points, products and services

2. High priority placed on using customer insights to drive decisions in merchandising, pricing and promotions,customer service, and marketing and communications.

3. Consideration given to both the emotive aspect of the shopping experience or how their customers feel about shopping with them and how they want to interact with them, and the tactile performance or how their customers use their products or services.

4. Prioritization of investments based on criteria that define a successful shopping experience for their best customers.

Provide adequate support, trainingand incentives to develop committed associates and adjust staffing models to meet the needs of your core customers.

Put in place the required IT capabilities to create a single view of the customer and operationalize customer insights.

Review all customer touch points across all your channels and adjust them so that they are connected and can enable near real time communications.

Update your information systems so that business logic can be shared across the enterprise. Becoming more customer focused is a multiyear journey that will require executive sponsorship in order to orchestrate the

changes required in culture,organization, processes and technology. It is a vital strategy for all retailers and the means for turning shoppers into advocates and creating a sustainable,differentiated advantage. Leading

retailers are already moving forward.The time to get started is now.

About the authors:

Herb Kleinberger is a Partner and Global Retail Strategy Leader and has over 25 years of experience consulting with retailers on strategy, operations and technology. He works with clients to evaluate and transform their operations, organizations and systems in order to improve customer service and profitability. Mr. Kleinberger is a frequent speaker at industry conferences and has coauthored several thought leader ship papers related to retail future business and IT trends, customer centric retailing and use of radio frequency identification in retail. His responsibilities include client relationship and leadership of the retail strategy practice within IBMGlobal Business Services. He can be reached at herbert.kleinberger@us.ibm.com.

Gina Paglucia Morrison is a Senior Consultant in IBM Global Business Services. She has over 15 years experience in business strategy and analysis in retail and other consumer related industries and is currently the retail team leader in the IBM Institute for Business Value.She works with retailers to understand and effectively respond to the competitive and consumer trends that are redefining the retail landscape. Shehas authored several papers on topics such as the future of the retail marketplace,customer-centric store experience, preferences of U.S. and European shoppers by shopping occasion, and the integrated merchandising supply network. She can be reached at gmmorris@us.ibm.com.

Key contributors:

Fred Balboni, Partner and Global Retail Industry Leader, IBM Global Business Services Bob Keseley, Partner and Americas Retail Industry Leader, IBM Global Business Services Maureen Stancik Boyce,Associate Partner, Global Distribution Leader, IBM Institute for Business Value.

About IBM Global Business Services:

With business experts in more than 160 countries,IBM Global Business Services provides clients with deep business, process, and industry expertise across 17 industries, using innovation to identify, create,and deliver value faster. We draw on the full breadth of IBM capabilities,standing behind our advice to help clients innovate and implement solutions designed to deliver business outcomes with far-reaching impact and sustainable results

References:

Heffernan, Robert and Steve LaValle. Advocacy in the customer focused enterprise: The next generation of CRM Done Right. IBMGlobal Business Services. April 2006.

Tesco Market Share Rises to 31.4% in UK Grocery Market. Dow Jones Newswires. Oct 19, 2006; Spethmann, Betsy. Loyaltys Royalty.PROMO Magazine, March 2004; Rohwedder, Cecile. Know thy customer: HowTesco is taking on Wal-Mart and winning Mining shopping data as retailers faceoff around the world. The Wall Street

Journal Asia, June 7, 2006.

JC Penney Annual Report 2005;FTD.com leads online retailers in September conversion rate, study says. Internet Retailer. October 24, 2005; jcpenney.com Surpasses $1 Billion in Annual Sales. JC Penney Press Release. January 17, 2006,

The first step for retailers is to review their desired customer experience against their existing operational capabilities and build a strategic roadmap that focuses on the priorities that matter most to their customers and that enables them to achieve their specific goals.

To stand out in a crowded marketplace, retailers need customer advocates, not just shoppers:

As you begin your journey, consider the following strategic actions:

Know who your most important customers are and have a clear understanding of what defines a successful shopping experience for them.

Incorporate segmentation strategies that go deeper than demographics and geography to include lifestyle, psychographics, shopping occasions or profitability to understand several dimensions of your customers.

Understand the profitability of each of your top customer segments by individual customer and have the capabilities to calculate lifetime value.

Leverage customer insights beyond marketing into key areas such as merchandising, customer service and store/channel operations so that the customer perspective is embedded into the day-to-day operations of the company.

Help ensure that customer data is available and shared across the organization to help eliminate the silos that prevent a common understanding of the desired customer experience.

Build accountability for the customer experience into all departments and levels of the organization so that customer satisfaction is everyones responsibility.

Kontzer, Tony. Extreme Makeover -- If your Web site has a 2001 style, its time for a new look. Heres what five companies are doing to improve their sites. Information Week. Nov 21, 2005.; Presentation by Paul Gaffney, Executive Vice President Supply Chain, Staples, Inc. at A.G. Edwards Retailing Conference, January 21, 2006; Krol, Carol. Staples preps easier e-commerce site; Office supplies giant revamps Web site to match customers catalog experience. B to B, March 2005. Stop & Shop grocery drives sales and boosts customer loyalty with IBM Personal Shopping Assistant. IBM. January 13, 2005. http://www-306.ibm.com/software/success/ cssdb.nsf/CS/BHAN-68LPYH?Open Document&Site=default

Levinson, Meridith. A season on the brink. CIO Magazine. December 2005. 7 Most of Consumer Electronics Purchases Influenced by Internet Research, Finds CEAYahoo! Study. Business Wire. October 23, 2006.

24-minute in-store pickup promotion on circuitcity.com

Dawn vonBechmann, Vice President of Multi-Channel Experience at Circuit City Stores, Inc., was a featured speaker at shop. orgs Moving Forward conference in January 2006. http://www.shop.org/firstlook06/ speakers.asp#dvb

Zimmerman, Ann. Thinking Local To Boost Sales, Wal-Mart Drops One-Size-Fits- All Approach. The Wall Street Journal. September 7, 2006.

Marks & Spencer innovates to get the right people and get them fast. SHL. 2004. http://www.shl.com/SHL/en-int/Clients/ Case_Studies/Case_Study_List/marks-andspencer.

Top-shelf employees keep Container Store on track. DSN Retailing. March 8, 2004; Creating the Customer Dance.

Presentation by Kip Tindell, CEO, The Container Store at the VNU Fine Jewelry CEO Summit. February 21, 2006.

Zimmerman, Ann. Thinking Local To Boost Sales, Wal-Mart Drops One-Size-Fits- All Approach. The Wall Street Journal. September 7, 2006; Berner, Robert. Fashion Emergency At Wal-Mart; Shoppers are ignoring the racks. Can the chain change its style-challenged image? Business Week. July 31 2006.------------------------------------------------------------------------------

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Becoming customer focused requires a shift in how retailers think about and organize their businesses. This is not to suggest embracing a new perspective and abandoning the old way of doing things. In contrast, it is about bringing together an inside-out, operational view with an outside-in, customer view to deliver a superior shopping experience. Traditionally, retailers have operated their businesses with an internal focus on their core operations that is product-centric. At the same time, the view of the shopping experience is often constrained by functional silos, which each have their own perspective and expectations for the customer. These separate views can lead to an ineffective customer experience due to an internal approach to managing operations that doesnt completely consider the impact on the customer. For example, customers continually toss the promotional mailers they receive at home because they are unrelated to their shopping baskets or habits. The reality is that marketing promotions are often created with a mass approach and are cast with a wide net (see Figure 1).

By balancing internal objectives with customer objectives, retailers can bridge the gap between what the customer experiences and how the company operates. The starting point for this transformation is leveraging customer data across the company.

Consumer insights are critical to align a product-centric view with the customer view

As retailers combine inside and outside perspectives, incorporating consumer insights into decision making across all core business processes is essential. Often times, retailers capture significant amounts of customer data, but it gets trapped in Marketing and is not leveraged across the company. This could result in a category being deleted because of low margin and poor sales performance, when this category was actually preferred by top customers. Fortunately, a retailer may discover this only after some of their best customers defect and take with them their purchases of low-margin items that didnt meet corporate targets, and the high-margin items that were bought in tandem. When insights are aligned with customer facing processes, retailers can transform their businesses in the following ways:

The focus on the shopping experience becomes channel, lifestyle and segment based.

Merchandise selection includes category, segment and local market needs and assortment decisions are based on optimizing the baskets of core customers.

Marketing becomes less mass-market driven and more personalized by segment.

Organizational metrics include both product performance and customer satisfaction (see Figure 2).

This alignment helps retailers build more satisfying shopping experiences and develop more customer advocates. For example, when marketing plans are tailored to specific customer segments based on shopping basket analysis, customers are happier to see monthly mailers in their mail box because they discover promotions they can directly use (see Figure 3).

Customer focus drives value across the enterprise

Greater customer focus helps drive greater value across the enterprise through improved revenues, margin and asset utilization. This value can be realized by adopting a set of customer strategies with clearly identified metrics, which can then be tied to measurable results and bottom-line business impact. I

For example, by developing more targeted marketing campaigns, retailers can help improve response rates, increase market and wallet share, and, in turn, drive greater revenue. U.K. grocer, Tesco, for example, sends out highly customized promotions based on insights gathered through its Club Card loyalty program. This has contributed to coupon redemption rates of 20 percent or more versus the 1 to 2 percent industry average, penetration rates of 80 percent, and an increase in market share from 16 percent in 1995 when the loyalty program was launched to 31 percent as of August 2006. Similarly, by optimizing multiple channels and leveraging existing assets and investments, retailers can help improve channel crossover rates and, in turn, improve revenue and margins. JC Penney, for instance, successfully leverages its Web site, catalog and stores and drives customers to shop across channels. Accordingly, jcpenney.com achieved US$1 billion in sales in 2005, has grown 30 to 50 percent consistently since its launch and has 10 percent conversion rates.

How do retailers operationalize this new view?

Six core capabilities are necessary for this transformation

A customer focused retail enterprise understands the entire customer experience and delivers against it to build customer advocates. To transform their businesses, customer focused retailers integrate six core capabilities

into their business models (see Figure 4):

Consumer insight

Customer focused retailers have a deep understanding of their core customers needs and wants and use these insights to develop a consumer-driven, outside-in approach to designing the customer experience. Retailers that have this capability know, for instance, who their top customers are and how profitable they are, what types of services they prefer, how their shopping needs vary by occasion and when and where they like to shop. The key components of consumer insight include:

Shopper intelligence and feedback loop:

Deep insights are captured from multiple sources such as interaction and transaction data, demographics and contextual information; customer feedback is encouraged and captured.

Moments of truth:

Transaction points with customers are identified, and the brand promise is delivered at all key customer experience decision points.

Outside-in shopping experience design:

The shopping experience is designed with a full understanding of what core customers expect, how they feel in their interactions with the retailer and how they use the products and services.

Multidimensional segmentation:

Core customer segments are defined based on life stage, product usage, psychographics and shopping preferences.

Targeted customer acquisition and retention:

Strategies for satisfying existing customers and acquiring new customers are based on deep insights.

Innovative consumer research methods:

New approaches to understanding and capturing customer needs, emotions and behaviors are explored and leveraged.

Personalized dialogs

Customer focused retailers have the ability to deliver relevant and customized communications to their customers in near realtime across all channels and touchpoints. With this capability, for example, a retailer is able to make customized recommendations at the point of sale (POS) to fill gaps in its customers shopping baskets based on past purchases. One U.S. grocer, Stop n Shop, offers its customers such recommendations through its shopping buddy device. The key competencies required to deliver personalized dialogs include:

Real time, intelligent messaging:

Customer insights become part of every interaction through the use of relationship attributes, life event information and data-driven decision making.

Value exchange and relevance:

Customers fully understand that the information they provide will be used to their benefit and a balanced trade is created.

Voice of the customer:

The customers perspective is embedded in the design of interactions and touchpoints; customers are encouraged to provide feedback.

Segmented treatment:

Core customers receive differentiated treatment based on their preferences and profitability.

Sales associate effectiveness:

Staffing models are adjusted to have the right skills available to meet customer needs, and associates have access to customer data to offer more personalized service.