November 14, 2018

Omnichannel Customers Are The Best Customers

Omnichannel customers may well be the best customers. But that doesn't mean that the omnichannel thesis caused customers to become best customers.

It can be hard to understand the concept of "incremental value". Simply put, incremental value is the additional value that you achieve, above and beyond what would normally have happened.

Let's say you have a customer who purchased online three times. This customer is about to purchase again, and wants to buy online. But the company invested money in a buy-online-pickup-in-store strategy (BOPIS as the pundits say), so the customer goes to the store and buys something. The customer is now an omnichannel buyer ... online and store.

Assume the customer would normally have migrated from 3x online / 0x retail status to 4x online / 0x retail status.
  • Annual Value increases from $76.79 to $98.59 ... $21.80 annual sales gain.
But instead the customer migrates from 3x online / 0x retail to 3x online / 1x retail status.
  • Annual Value increases from $76.79 to $114.81 ... $38.02 annual sales gain.
The incremental gain, of course, is the difference between what would have happened ($21.80) to what now happens ($38.02). The difference is $16.22 annual sales gain.

The $16.22 is the incremental annual sales gain caused by the omnichannel thesis. It is more than $0, so that tells us that the omnichannel thesis has some value. That's a good thing.

Then there's the bad thing.

First, we subtract cost of goods and we're left with maybe $6 of annual value. Then we subtract the incremental cost of transacting in a retail store ... that could (depending upon your CFO) include incremental retail employee costs, store rent, and potentially interest expense because the customer is now required to contribute to pay down the debt required to build the store. Worse, the customer has to pay for the incremental cost of the software required to make "BOPIS" possible in the first place. These costs are compared against online costs (pick/pack/ship) ... so you only assess the incremental above-and-beyond costs associated with moving the customer down this path.

This is where the "omnichannel posse" hops on Twitter and condemns the analysis. They'll say that there are customers who wouldn't buy, period, unless the BOPIS option was available. That's a hard one to prove ... but sure, go ahead and tell me how many customers fall into that category, and we'll give full incremental value to those customers and assign credit to the omnichannel thesis. This is a wild guess, of course, so we should discount the value of a guess, right?

From there, you run a profit-and-loss statement. Did the omnichannel thesis provide enough incremental profit to offset the costs associated with moving a customer into omnichannel status?

Show of hands ... how many profit-and-loss statements have you seen that factor in incremental value?

This is the style of analysis required to prove that the omnichannel thesis is appropriate. Go run it, ok?

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