July 17, 2019

The Problem With Retail

We've got three types of traffic in retail.

  1. EARNED:  This is traffic we earn, via customer loyalty or word-of-mouth or free uses of social media or email marketing.  We somewhat control this via our successes or failures.
  2. PAID:  This is traffic we pay for. Google, Facebook, Display Ads, TV Ads, Billboards, Radio, and countless other channels/tactics. We control this source of marketing via our marketing budget. The traffic flow generally is generally variable, following some form of a a^x function, where "a" is the marketing investment and "x" is the efficiency slope of marketing success.
  3. SHARED:  This is traffic we share with our peers. It's the traffic that Macy's brings into a mall, traffic that buys an old-school Bose Wave Radio. If Macy's closes or loses traffic, Bose loses business. That's bad for Bose.
The secret to fixing retail is understanding how much of your sales come from EARNED, PAID, and SHARED sources.

Let's say that you are a brilliant synergistic customer experience channel-less frictionless marketer. This area of marketing generally falls under the EARNED banner. If you do a great job, you increase your EARNED traffic.

Pretend that your traffic comes from the following sources:
  • EARNED = 30%.
  • PAID = 20%.
  • SHARED = 50%.
Now pretend that your synergistic customer experience channel-less frictionless entertainment-centric strategy results in a 10% increase in EARNED traffic (that would be really, really awesome ... and really, really hard to do).

And let's say that you boost PAID traffic by 5% via a 10% increase in marketing spend.

Finally, let's say that your SHARED traffic drops by 17% because all of your peers in your mall-based stores are not doing well.

Next Year's Traffic = 0.30*1.10 + 0.20*1.05 + 0.50*0.83 = 0.955.

You worked terribly hard to grow what you control by 10% and your total traffic drops by at least 4%.

Now you know what needs to be solved.

To be successful in retail, you have to come up with a solution for the SHARED traffic problem.

SHARED traffic will continue to be a challenge, so retailers have no choice but to increase EARNED/PAID traffic faster than SHARED traffic decreases. The problem, of course, is that if you spend money to grow EARNED/PAID traffic you de-leverage the p&l. If you don't spend money, traffic decreases and sales decrease as well.

In other words, retailers have to become really CREATIVE. That's going to be one of the key ways that we get through the SHARED traffic problem.

If your favorite retail guru doesn't have a plan for the following equation, your retail guru has some work to do:
  • x*EARNED + y*PAID > z*SHARED

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