August 18, 2014

How Can I See A Feedback Loop Forming?

Let's take a simple example. I've witnessed this one in retail.

Take a customer who purchased exactly two times in the past year. Segment that customer based on channels purchased from in the past year. Then, measure spend in the next twelve months. Repeat the analysis for each of the past five years (projecting 2014 to conclusion). Your analysis will look something like this:

From 2010 to 2011, you'll see that retail performance improved, while online performance largely held steady.

But take a look at 2012. There is a subtle shift. Customer value remains constant, while share of dollars shift from retail to online. From 2012 to 2013, the shift accelerates. From 2013 to 2014, the shift continues.

This is the start of a feedback loop. Next, you'd analyze new customers by channel. If new customers are growing in e-commerce, and are in decline in retail, you've got a feedback loop developing. Your customers are shifting from retail to e-commerce, and the shift in behavior is accelerating.

Now, you have a responsibility. You have a responsibility to forecast where this trend is headed, over the next five years. If this continues, what does your business look like in 2019? And if you don't like what retail looks like in 2019, well, you've got five years to either change the trajectory, or to adjust to the inevitable.

This style of thought is missing. You cannot simply say that you'll fix everything by becoming "omnichannel". Let's say you become more omnichannel, and by doing so, you accelerate the trends you observe above. Now what? Your CFO wants to shut down 200 stores because there's no traffic left in those stores. What has been accomplished?

It's time to start thinking about what feedback loops are doing to the businesses we manage. We have to get out from under the weight of conversion rate and response rate measurement. It's time to take insights a step further.