Mega-Trend #2: How Will We Acquire A New Customer In 2020?

Want to avoid becoming a dinosaur? You'll need a low-cost customer acquisition program, no two ways around it.

Think about this for a moment. Your creative team does an amazing job of displaying one of your widgets. The widget looks beautiful, compelling, a must-have if there ever was one. A customer in Albany loves it, too, causing her to post an image of the item on Pinterest. There, on Pinterest, another individual also loves the item ... and Pinterest ... PINTEREST ... feels like they deserve to be compensated for helping spread the word on your behalf. If you want access to this customer, a customer generated because of the brilliance of your creative team (mind you), you need to pay Pinterest for this unique opportunity. That's called a "toll". Tolls lower your profit per new customer, and consequently, lower your overall profitability.

There's Macy's, always scrambling to play catch-up to others, focusing on omnichannel to a fault, obtaining few or no additional new customers in the process, while their hated rival (Nordstrom) acquires a half-million or more new customers a year through Nordstrom Rack stores. Sure, Nordstorm has to tack on a veritable plethora of fixed costs to build out these Rack stores ... but the strategy of realizing that the middle class is gone and the way to find new customers is to offer something that a lower-middle-class person can afford yields dividend, more than covering the fixed cost infrastructure necessary to build the customer acquisition platform.

See, a company like JCP, or Macy's, or J. Crew is facing a challenge ... their source of new customers come largely from middle class or upper-middle class customers ... the quantities of which are in decline. They can choose to acquire new customers through great merchandise (they all sell essentially the same stuff as the competition sells), they can attempt to acquire new customers by integrating channels (never seems to work, ask Circuit City, Borders, and countless others including J. Crew and JCP and Macy's), or they can follow customers into the economic toilet by offering a merchandising assortment that a lower-middle-class customer can afford.

Macy's chose omnichannel, years ago ... and are stuck in a rut today because of this attempt at acquiring new customers.

Nordstrom full-line stores are not growing, in quantity or in sales ... but their decision years ago to acquire new customers via Nordstrom Rack yields huge benefits today.

Make the right choice today, and you benefit in 2020.

Which brings us back to Mega-Trend #2:

• How Will We Acquire A New Customer In 2020?

Mega-Trend #1: Merchandise Productivity

Have you had an opportunity to read this blog ... the J. Crew Aficionada (click here)?

Here's somebody who is so passionate about J. Crew that she writes about the business. No mention of omnichannel, which is interesting. What is she writing about?

Merchandise!!!!

Frustration with merchandise ... check out this post (click here), and more importantly, check out the comments ... no mention of dissatisfaction with channel strategy ... but A TON of dissatisfaction with size, fit, style, quality.

You saw what happened with Gap (click here). Notice that Gap is not closing outlet stores. No merchandising problems there ... same company. There, the price/value proposition is appropriate for the customer being targeted. Notice that Old Navy is not closing stores. There, the price/value proposition is appropriate for the customer being targeted.

All of those brands are under the same umbrella (Gap, Gap Outlets, Old Navy) and are using the same systems and same omnichannel strategy. This tells us how important merchandise is. It's the number one mega-trend of the next few years. The customer only cares about merchandise. Do you sell something the customer wants to buy, at a price the customer wants to pay? It's that simple. And it's something we've ignored for the past five years, as we looked to align all of our channels around a mythical result that did not happen.

H&M focused on merchandise productivity, in the process reinventing fashion. Notice in the Gap article how their lead times cause them to not be able to react for maybe the rest of this year. Look what H&M did to their competition? That's what happens when you get merchandise productivity right.

Mega-Trend #1 is critical ... it's merchandise productivity.

You are a marketer. For the past decade, you've been trained to manage the transition from offline marketing to digital marketing. You've largely mastered this transition. The transition is over (though if you market to a customer < 35, the transition to mobile is just beginning). Now the second phase of the transition begins ... figuring out how to market the right merchandise to specific customer segments. Most of us do not possess this skill, heck, we haven't had to learn it. But those days are over. The companies that figure out how to merchandise to their customer audience, via marketing, via merchandising strategy, via an integration of the marketing/merchandising departments ... these are the companies that will enjoy gains in the next five years ... until the next mega-trend hits.

Gap To Close 175 Stores, Shutter 250 Corporate Positions. #Omnichannel!!!!!

Click here, friends.

The omnichannel movement is devastating in an environment of declining merchandise productivity. Sales decelerate, commodity item sales move online within the brand, causing stores to be even less productive. Eventually .... you close 25% of the footprint, and you forfeit $300,000,000 in break-even or unprofitable in-store sales that cannot be recouped online. The faster you digitize the business, the faster you move the sale of commodity-based items from in-store to online within a brand, and consequently, the faster you accelerate the closure of stores.

You don't read about this dynamic from vendors, do you?

You don't read about this dynamic from consultants, do you?

You don't read about this dynamic in trade journals, do you?

You don't read about this dynamic from research brands who invented the phrase "omnichannel", do you?

But you've been reading about this dynamic on this blog, for years.

The future is here.

I know, you don't care that I was right. You listened to the wrong people, and now you want advice to fix the problems they created.

If we are going to pursue an omnichannel strategy of bland sameness across all channels, then we must also craft a strategy of uniqueness within the retail channel. Otherwise, why would the customer ever bother to enter a store and be presented with digital wonderment in the first place? Notice that, as of today, Old Navy stores are not closing. Same omnichannel strategy ... one brand is imploding, the other succeeding. It tells you how irrelevant omnichannel strategy is. It also communicates, rather clearly, how important merchandising strategy is.

Merchandising Strategy. It's one of the three mega-trends.

E-commerce is slowly bleeding 2% off of retail comps, every single quarter. This requires exceptional merchandise productivity gains, in-store, to overcome the 2% bleed, and then generate the comp store sales increases necessary to offset inflation. We can only solve this problem with brilliant merchandising strategies that drive customers into stores. We won't accomplish this by demanding that the customer buy from a generic assortment in any channel.

This problem can be solved. Ignore the tactics that make vendors, trade journalists, consultants, and researchers money. Focus on the tactics that make your business profit.

The Three Mega-Trends

I probably need to write a booklet about the three mega-trends:

1. Outstanding Merchandise is the key to engaging a customer (i.e. getting the customer to buy something).
2. How Will We Acquire A New Customer In 2020?
3. How Will We Avoid Paying Tolls To Mobile/Social/Digital/Offline Parasites?

When you are planning your July Executive Offsite (the "JEO"), these should be the three topics you discuss. The topics cover all the bases.

Let's talk about the topics over the next few weeks.

Kohl's - I Cannot Ever Recall Seeing This Happen

Kohl's gives the Chief Merchandising Officer job to the Chief Customer Officer (click here).

Here's the quote you need to remember:

• "It became more clear everyday that these two things, customer engagement and product, are linked completely," he said in an interview.

The article describes two movements, happening at the same time.

1. The omnichannel theory is validated - props to the omnichannel folks. E-commerce and store ops are fused, seen now as one thing, reporting to a Chief Operations Officer. But this is not the central story - and that's an important realization. Omnichannel, as we know it, is part of Operations.
2. Priority is clearly assigned to a fusion of merchandise + customer experience. Think about that one for a moment.

In 2015, I've workd on 2.5 Merchandise Forensics projects for every 1.0 Customer Optimization project. There is a fundamental change happening across my client base (three years ago, I sold zero merchandise-centric projects, period), and it is not a change that is channel-centric. There is a realization that Merchandise, yes, Merchandise, is what fuels the customer experience.

I do not every recall an instance where a person without merchandising experience moved into the Chief Merchandising Officer position at a $100,000,000+ sized company. I've seen marketing gurus move into Executive Merchandising positions - but never the top of the pyramid.

I'm not saying this move is right/wrong - it's dangerous to predict the future, simply because it is nearly impossible to ever be right.

I am saying that there is an obvious trend that is shaping the future, and it is time that we pay attention to the trend - it is time to give the trend proportional attention:

• Merchandise fuels the customer experience.
• If we don't focus on merchandise, there is no customer experience, and there are no channels to integrate.

J. Crew: -10% Comps

Did you read this one (click here)? I gave J. Crew a lot of praise a few years ago, communicating how it was "all about the merchandise" and they were clearly succeeding on the merchandising front.

There are three mega-trends that are dominating my client discussions:

1. Can we increase Merchandise Productivity today?
2. How will we find New Customers in 2020?
3. How do we avoid the growing number of Tolls the mobile/social folks are placing on our businesses?

J. Crew's challenges deal with (1) and (2). Fashion often results in missteps and wild productivity swings, and fixes are time-lagged, meaning that if problems are fixed today, results won't be seen for six months, a year, or more. Just as important, with retail moving down-market at a breathtaking rate (Nordstrom Rack, Old Navy as examples), how does a company like J. Crew find new customers for the mid-market placement they occupy?

Again ... three mega-trends are dominating client discussions:

1. Can we increase Merchandise Productivity today?
2. How will we find New Customers in 2020?
3. How do we avoid the growing number of Tolls the mobile/social folks are placing on our businesses?

Your Co-Workers

Do you know who this woman is? 

I don't.

How often can you say the same thing about a co-worker you pass by in the hallway?

More on that in a moment.

I attended a conference earlier this year. One of the Executives at the conference said something interesting to me. We were talking about vendors. The Executive was frustrated with one particular vendor. I mentioned that the Executive could choose to spend less money with this vendor, and instead utilize a competitor. The Executive looked at me, and with the kindest possible look on her face, she issued the following statement:

• "But their staff are like co-workers to me."

The comment carried little weight ... month after month. Until late last week. Then I figured out why it seems like so many of my messages fall flat.

In so many cases, I am challenging you to make changes that I am confident will improve the profitability of your business. I wouldn't ask you to make the changes unless I had proof (via the client work I perform) that my recommendations generate profit. But then, for you to implement my changes, you need to work with your vendor partners ... often challenging the vendor to make changes.

In other words, I am asking you to do things that may cause discord with individuals you perceive to be co-workers of yours. You might have to tell your vendor co-worker that the individual is doing a poor job. You might have to tell your vendor co-worker to create a product that the vendor co-worker isn't capable of creating, or doesn't want to create. You might have to tell your vendor co-worker that you are going to spend less with his/her brand because spending less benefits your brand more.

Why would you want to hurt the feelings of a co-worker? You wouldn't want to do that, would you?!!!

Here's a fascinating tidbit for you. Let's run a quick quiz. Which project do you think I've sold more of in 2015, by a margin of 2.5 to 1.

1. Contact Strategy Optimization.
2. Merchandise Forensics.

The answer is (2), Merchandise Forensics.

Why is that interesting?

How many hours per week do you, the marketing professional, spend working with your merchandising and/or creative teams?

How many hours per week do you, the marketing professional, spend working with your vendor co-workers?

Of course you're going to ask me to perform Merchandise Forensics work for you ... that project isn't going to interfere with your pre-established vendor / co-worker relationship ... even if that relationship is costing your business millions of dollars of profit per year. With a Merchandise Forensics project, we're just looking at challenging your Merchandising Team, and you barely interact with those folks ... even though they are responsible for the stuff you are marketing to customers ... even though they are truly co-workers!

In the past fifteen years, the co-worker relationship changed. A twelve-person marketing department became a six-person marketing department with two-dozen vendor relationships managed by the remaining six individuals in the marketing department. 

Marketing has been outsourced, and in the process, the working relationship with marketing outsiders is deeper, more emotional, and more meaningful than the working relationship with the Creative Manager who is seeking optimal lighting during a photo shoot in Kauai - more close than the working relationship with the Buyer who must avoid being fired by accurately forecasting the sale of 973 widgets via perfect sell-through.

This working relationship creates an unusual and conflicting set of incentives. Fifteen years ago, your entire marketing department was incented to generate as much profit as possible. Today, with 70% of your marketing department represented by outside vendors, you have a dozen conflicting objectives. You must generate as much profit as possible, requiring you to obtain products and services at the lowest possible cost ... while your vendor co-worker must sell you additional products and services at the highest acceptable cost. 

I was at NEMOA in Spring 2014. A representative from a vendor you all know and trust saw me walk into a session. She called me over. And in front of my client, she mentioned how she took my (her) client to a Boston Bruins hockey game, and took the client out to dinner. She mentioned that her organization loves her clients, and treats them appropriately, with various perks. She then asked what, specifically, I do for my clients if I don't take the client to a sporting event or out to dinner.

"I generate profit for my clients".

But profit isn't enough for many of you. Name one time your Chief Financial Officer paid to take you out for Alder Planked Copper River Sockeye Salmon followed by a Major League Baseball game? Your vendor co-workers use emotional incentives to create a bond (smart idea). It's your money they're using to create the bond, but regardless, they treat you better than many of your actual co-workers treat you, be honest!! Sometimes, your Merchandising Team just yells at you, telling you that your email marketing program is pedestrian, criticizing your catalog mailing efforts ("you have no idea who to mail, a trained monkey could do a better job"). Who are you going to side with, when push comes to shove?

And vendors can (oh yes, this happens) align their services in such a way that maximizes vendor revenue ... if you mail more co-op names, you pay more in merge/purge costs, you spend more money on paper, you spend more money on printing, you spend more money on postage. Is it any wonder, then, that at an industry conference, your vendor co-workers all pay sponsorship fees to obtain speaking assignments where they sell a message that promotes increased marketing spend? Vendors would be crazy to question a co-op, because questioning a co-op may result in a client spending less with co-ops, which then trickles through the rest of the vendor ecosystem, hurting all vendors.

Do you understand the ramifications of the dynamic I just described?

Last week, I came to the realization that so many of us have better working relationships with our vendor co-workers than we have with in-house employees. We have no idea who the woman is at the beginning of the blog post, even though we have a responsibility to work with her to increase profit for the company we work for. Conversely, we have close relationships with vendor co-workers, and those relationships are fraught with conflicting incentives. Yes, the vendor should provide solutions that increase sales/profit, thereby allowing both parties to profit, but that isn't often the case (in reality).

Is it any wonder, then, that the message marketers constantly read is an omnichannel message promoted by the vendor community? And we have an emotional incentive to listen to this message, because the folks offering the message are more like co-workers to us than our actual co-workers.

Maybe you disagree. That's fair. Your circumstances may be different.

I wouldn't share this tidbit if I didn't keep running across variants of it.

The vendor community is embedded into your marketing department, that's just the reality of modern marketing. You likely have more vendor employees working to grow your business than you have actual employees. Their incentive structure influences what they ask you to do. Their aspirations influence the tactics they ask you to execute. Their desire to innovate influences how innovative you are.

This isn't a good thing.

This isn't a bad thing.

This is just a "thing".

But it is a "thing" that must be dealt with. For if we continue to value the vendor co-worker relationship more than the merchant/creative/finance co-worker relationship, then we will ultimately execute the wishes of our vendor co-workers. Maybe this is best for us. Maybe not. But we should at least think about the topic strategically, don't you think?

Use the comments section (or email me at kevinh@minethatdata.com) with your thoughts.