March 29, 2007

Multichannel Forensics And Executive Leadership

Recall that there are two key elements in Multichannel Forensics.

First, how well do you retain your customers?
  • If you retain more than sixty percent of last year's customers (in other words, more than sixty percent of last year's customers purchase again this year), you are in Retention Mode.
  • If you retain between forty and sixty percent of last year's customers, you are in Hybrid Mode.
  • If you retain less than forty percent of last year's customers, you are in Acquisition Mode.
Second, what do you customers do after they purchase from you?
  • Do they only purchase your products, brands or channels (called Isolation Mode)?
  • Do they like to try out other products, brands or channels (called Equilibrium Mode)?
  • Do they switch to other products, brands or channels (called Transfer Mode)?
  • Do they switch back and forth between products, brands or channels (called Oscillation Mode)?
The combination of modes determines the business strategy for a product, brand or channel.

Let's evaluate Circuit City, as an example. It is well documented that customers shop Circuit City via the online channel, then either purchase merchandise in-store, or purchase online and pick up product in the store.

Retail executives manage channels that have very different dynamics:
  • The retail channel frequently operates in Retention/Isolation Mode. In other words, last year's store customers purchase in-store again this year, and are not likely to shop other channels.
  • The online channel frequently operates in Acquisition/Transfer Mode. In other words, last year's online customers are unlikely to purchase online this year --- instead, the customer shifts purchasing to the store channel.
When business units operate under vastly different modes, leaders are needed to complement the mode of the business unit.

The leader of the online channel should be collaborative, one who does what is best for the total business. Her bonus structure should be based on her ability to facilitate customer purchases within any channel, not just her channel. The strategic development of her channel should be crafted around the natural behavior of her customer --- to shop in stores in the future.

The leader of the retail channel can be a different individual. Teamwork skills and collaboration may not be as important, because this individual has customers who are not likely to switch to the online channel --- and if the customer does switch, it is only to get information about retail merchandise.

Multichannel retailing is all about exploiting the strengths of each channel. It is not about "sameness", not about replicating the customer experience the same way in every channel.

This holds true for the leaders of each product, brand or channel.

In the Circuit City example, it may make sense to have a very experienced leader manage the online channel. This leader should be well versed at collaboration, consensus, humility, leading through others. This leader should be comfortable with not getting credit for all the good she does to make other leaders look good.

Conversely, it may make sense to have newer executives work in products, brands or channels that are in "isolation mode". In these instances, the leader has control over things, and has fewer moving parts to worry about.

All too often, we assign new leaders to smaller business units, business units with the least "risk". In reality, we should think about putting our most talented leaders in the most challenging roles. Those roles tend to happen in "equilibrium" or "transfer" mode.

10 comments:

  1. I must be reading way too many marketing-related blogs, because my eyes are glazing over reading time and again about "retention". It strikes me that: 1) people use that term with different intended meanings, and 2) that it's a poorly defined concept in the first place.

    Let's say I bought a pocketbook for my wife for Christmas from Macy's. And I haven't been back in there since. Have they "retained" me or lost me? Since I haven't purchased another pocketbook in the meantime, who's to know?

    I think what you're describing with your retention/hybrid/acquisition modes is repeat purchase rate.

    And I think you're leaving out an important element in the analysis: The rate of change in purchase amount. E.g., if I "retain" 80% of my customers, but that 80% spends 150% of what they spent the year before, I'm doing ok.

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  2. I wish you could get 14,000,000 Macy's customers to increase spend by 150%, year over year. You're right, as an executive, you'd be doing 'ok'.

    There are hundreds of ways to describe retention or repurchase or repeat purchase. None are right or wrong. Every company looks at it differently.

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  3. Here's a follow-up comment regarding customers verses spend.

    In seventeen years at Lands' End, Eddie Bauer, and Nordstrom, I can recall four years where there were significant improvements in price per item, items per order, or orders per year.

    In other words, out of seventeen years (albeit at only three companies), I recall four years where these three elements combined to significantly improve business results.

    In every one of the seventeen years, the ability of the company to improve the rate at which the company retained last year's purchasers, or the ability to improve new customer acquisition, caused the business to succeed or not have a good year.

    Most of the executives I've worked with think about getting good customers to spend more and more and more.

    Most of the successful years I've been associated with happened because we retained more customers, or acquired more customers.

    Having said all of that, it is important to get customers to spend more. Increased spend is an important element in the success of a business.

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  4. Hi Kevin,

    Thank you for this post. It is great to get marketers thinking about these modes! Too many operate in the same mode all the time without looking to other avenues of purchase and interaction.

    The discussion in the comments makes me think of the Return on Customer measure put together by Don Pepper and Martha Rogers. You are probably familiar with it already. It says that we should measure the health of our businesses by understanding how well we not only retain but how we grow customers. By maximizing the value of the customer base, we increase the value of the company. Adding in a measure such as this helps us keep the end goal in mind - to grow the business.

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  5. Thanks, Becky. You more eloquently said what I was trying to get out. "Retaining" customers is a mythical measure of success. If they don't continue to buy, and buy more, than any investment made to "retain" them will likely produce negative returns.

    (fyi, becky -- I had a chance to meet Martha and see her speak this week abour ROC at the DMA financial services conference).

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  8. I deleted my last two attempts to communicate!

    Ron, we can agree to disagree --- we have different points of view on this. I do understand your point of view, and think it has value for my readers.

    Becky, welcome back! I agree that there is value in measuring the value of an organization based on the future value of the current customer base (i.e. growing the value of the customer base).

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  9. Anonymous4:21 PM

    "a customer's not a customer until he's a repeat customer" as attributed to Sam Walton. So in Ron's Macy's example, he really isn't a customer.
    In essence, Kevin is right that retaining the customer is one of the most essential parts of business but I think the categories are a little broad. Also, wWhile I understand need to "maximize" the customer, Ron's first comment sounds like it leads to an 80/20 rule, where 80% of business driven by 20%, i.e. concentrate on the 20%. I don't think that would be a correct formula, but he does make a valid point.
    Regarding growing the customer base, if you treat your best customers well, you build rep that brings new customers.
    Reminds me, Kevin, of your post earlier though about the Private Parties for loyal customers--doesn't that reinforce Ron's point?

    Interesting questions and comments by all three of you.

    K

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  10. Hey Anonymous --- you'll find that Ron has many good ideas and comments.

    I'd surmise that most analytical folks share 85% of the same views. It's the unique experiences that each analyst has that create the differences.

    The Sam Walton comments is appropriate for a "Retention" based business model. Wal-Mart has to get that customer in the store, buying something over and over and over again, week after week.

    There are a myriad of business models that thrive on infrequent purchases. A business like Pottery Barn runs in "Acquisition Mode". You don't need what they sell, week after week after week. You might only need their merchandise every eighteen or twenty-four or thirty-six months. For a business like that, moving retention of buyers from 37% to 42% is a big deal --- and it does matter that you retain a customer who only buys once a year.

    Finally --- you mention that the classifications are too broad.

    They are purposely too broad. Analytical folks will crave far more detail than what I provide.

    However, I'm not speaking to an analytical audience. My target audience is CEOs and Executives. These folks are not as analytical as you or I. Many of these folks need simplicity, they need broad categories they can understand. They simply don't have the time to dig in further --- they need to know the role of their product, brand or channel, and then get their employees to maximize the potential of their product, brand or channel. That's why this framework has been created.

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