THE SALES EQUATIONS Data-driven retail and neuromarketing

Each year sees the publication of reports on the retail trends in store for us over the coming months, such as those published by Price Waterhouse Coopers and TNS Retail.

data-driven

Image: Carla Vallès

At the start of 2015, one forecast on which most of these reports are in agreement is the consolidation of data-driven marketing (Honaman, 2015). Applied to retail, this involves using business data to be able to carry out actions, such as special offers, for a particular customer based on their location in the store, whether through screens or the customer’s own smartphone. This can equally be applied to physical and digital stores.

Such personalized action activity is based on the use of technologies such as multimedia installations fitted with cameras to detect the sex and age of approaching customers, instantly showing them a promotion adapted to their profile on the screen. The other technology underpinning such initiatives is currently growing in double figures and is paid for by the customer: their smartphone, linked via Bluetooth, iBeacon, NFC (Near Field Communication) and, logically, the CRM.

The sales equation

The usual method of quantifying sales in a physical store and estimating potential growth applies the following parameters:

  • Size of the scope of influence.
  • Number of people of the main target segment.
  • Achievable market share, taking the competition in the area into consideration.
  • Frequency of visit.
  • Conversion rate (% of visits that end in a purchase).
  • Average purchase (= quantity of products x price).

The last of these parameters should be broken down into two parts, depending on the customers’ behaviour:

  • Items they planned to buy, that were on their ‘shopping list’.
  • Unplanned purchases. The relative weight of this part varies significantly depending on the sector and retail format.

It seems clear that many of the aforementioned technologies tend to focus on this last part of the equation nowadays. Lindsey (2014) also confirms that the majority of inter-related technologies on which data-driven retail is based are highly focused on increasing impulse purchases.

Neuroscience’s interpretation

Most people know that the vast majority of human decisions are subconscious or implicit, activated by the limbic system, one of the fastest parts of the brain which, paradoxically, consumes the least glucose. The cortex, the part of the brain that activates when we do something consciously, is much slower and consumes a lot of glucose.

When we do the shopping, we pick out the planned items almost semi-automatically. However, when an offer catches our eye or we get a promo message on our smartphone, we switch from the ‘automatic pilot’ of the limbic system and turn our newly-activated attention to the message we have received. This is when the cortex kicks in, meaning that we are making a mental effort, as we consume more glucose that just a moment earlier.

As Dr. Ralf Ebert explains, when somebody makes effort while shopping, the same part of the brain is activated as when we suffer physical pain: our brain interprets it as an implicit pain. For this reason, when we ask for customers’ conscious attention, it must be compensated for with a relatively large reward (for instance, a real bargain or a moment of happiness).

Customer loyalty is quantifiable

It is well-known that customer loyalty is one of the two founding pillars of the retail business model. Nobody can make a living from customers that buy just once. We want and need them to keep coming back and purchasing repeatedly.

As such, in other words, the company must perceive itself not as a seller of products or services, but rather as a customer cultivator.

This can be quantified. The measurement for calculating the value of a specific customer over the long term is the Customer Lifetime Value (CLTV) or, to put it another way, how much each customer is worth (in € or $) if they continue shopping with the same pattern and habits as they have done so far.

On the following website, Harvard Business School has developed a simple tool for simulating CLTV.

So, how can we stimulate loyalty? Many people think that the key is a fascinating and highly sensory shopping experience. However, one study (Dixon, Freeman and Toman, 2010) shows that customer loyalty is achieved more effectively by reducing the efforts they have to make while shopping, providing what could be referred to as a friction-free shopping experience.

Do these trends work against customer loyalty?

If enhancing the sales equation involves tiring out our customer’s brain, we need to get rid of any unnecessary loads on this journey. To put it in a more contemporary way, if sales are encouraged using ‘push’ promotional strategies, tired out customers may stop coming to our store. This is what many tourists end up doing, crossing the street to avoid waiters who stop them to persuade them to enter their restaurant.

To avoid such problems, the following seven tips may be of use:

  1. 1. Interlinked with the CRM, commercial and contextual data (weather, events, etc.) represents a powerful source of opportunities for gaining greater understanding of the customers, to later be able to implement suitable actions to grow the business. Market intelligence is a key part of any good marketing and sales department.
  2. When we do the sums, the CLTV is greater when customers keep coming back to the store, despite their average purchase each time being lower.
  3. Take full advantage of the fact that smartphones know their owners’ context (space and time) so that they can receive offers adapted to their present situation.
  4. Avoid excessive promotions or communications that force customers to pay too much conscious attention. If we fail to do so, we contaminate the store and cause their psychological self-defence mechanisms to kick in.
  5. Whenever we want to grab the customer’s attention, we have to offer them some kind of reward by way of compensation.
  6. As far as the customer’s brain is concerned, one strong promotion is far better than twenty weak ones.
  7. The rewards must be relevant. In other words, if we possess customer data, we have to be able to offer them something that is truly adapted to their needs. There is no point sending them a promotion for nappies if their kids are all grown up. If we do not manage this, the store may be seen as rude or, even worse, irrelevant to the customer’s life.

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Bibliography

  • Price Waterhouse Coopers & TNS Retail (2007) “Retailing 2015: New frontiers”.
  • Honaman, J. (2015) “Top 6 retail trends to watch in 2015” in Retail Info System News, 5th January
  • Lindsey, K. (2014) “Sealing the deal: Six digital tools targeting impulse shoppers” in Retail Dive, 27th May
  • Dixon, M., Freeman, K. & Toman, N. (2010) “Stop trying to delight your customers” in Harvard Business Review, July.

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Lluis Martinez-Ribes

Source: Código 84, number 185

March 2015

WHERE HAVE ALL THE CUSTOMERS GONE? An overview of showrooming

An MBA student from ESADE who was taking my Retail Innovation course (September 2014) mentioned to me that, in Shanghai, several shopping centres have repurposed entire floors, with a shift from stores to restaurants.

martinez-ribes-showroom

(image: artchandising)

There are lots of countries in which retail chains are struggling to keep up sales and productivity, with many cases ending up in store closures. In the United Kingdom, the proportion of empty stores in 2008 was 5%. In 2014, this figure rose to 13.4%, according to statistics from the Local Data Company.

Forecasts in Europe predict a 3.5% increase in conventional retail sales in 2014, compared to an estimated rise in e-commerce of 11% in the same period. This figure reaches 18% in countries in Southern Europe (Reingold & Wahba, 2014, and Enright, 2013).

However you look at it, the statistics show that the retail sector is undergoing a profound transformation for one main reason: customers now buy in a different way. One of the best-known new ways of shopping is showrooming, the cause of so many headaches lately.

As EKN defined them in 2013, these showroomers are “channel agnostic customers” who completely interconnect all of the interfaces or channels.

Showrooming

Warc (2013) defines showrooming as the phenomenon by which customers see the product in a physical store and then buy it online at a lower price.

However, the practice of buying a product cheaper elsewhere was commonplace long before the internet existed. For instance, people often find out about and look at a washing machine in a department store in the city centre and then end up buying it cheaper at a neighbourhood shop.

A second subtle yet important point that is often overlooked by this common definition is that showrooming only becomes a concern for city centre stores when they miss out on the sale of a non-exclusive product. Zara does not worry unduly about a customer looking at an item of clothing in-store and then buying it on the chain’s own app or website.

Therefore, showrooming occurs when somebody checks out a non-exclusive product in a physical store and then buys it at a better price usually but not always online. Bearing in mind the growing number of people using smartphones, it seems clear that this is the great catalyst that has triggered the recent boom in showrooming around the world.

At its root, showrooming is a case of a multi-interface shopping process (physical store, smartphone, tablet, laptop, other physical stores, etc.) that takes place in various contexts (at home, in-store, somewhere outside the home with an internet connection, etc.)  [1].

When showrooming occurs, the main activities or functions traditionally performed by customers in the shopping process (see attached diagram) no longer have to happen in this order, nor through the same interface.

lmr-showrooming-en-b

(Click to enlarge / image: artchandising)

The fact is that, as a result of showrooming and even more so when smartphones come into play, the shopping process is no longer linear, but rather less predictable and subject to more stimuli that traditional ways of shopping.

Why do customers go to the physical store?

We know from experience that, when we make a decision, two things can happen: we get it right (making us feel good) or we get it wrong (making us feel bad) [2]. All purchases require a number of decisions, including which store to go to, which products to rule out and which one I end up choosing. To reduce the risk of error, we need information.

The information required for decision-making is different depending on the interface (digital or analogue) that is used to obtain it:

Type of information about: Analogue media Digital media
Functional aspects (product performance, price, etc.). Limited information (labelling).

Often higher price.

The information may be more detailed.

Often lower price.

Sensory aspects (user-friendliness, style, weight, etc.). Perceived with the 5 senses. Perceived with 2 senses (3 in the case of touchscreens).
Symbolic aspects (associations with the chain and the product). Depends on the case. Depends on the case.

We can see, therefore, that stores in which customers can see the product physically have an advantage from the perspective of the sensory contribution, while online stores tend to win in terms of functionality (sometimes with respect to greater information and often with a lower price). In symbolic terms, the influence of the brand has to be weighed up on a case to case basis. This could equally be said for both physical stores (e.g. Carrefour) and online operators (e.g. Alibaba).

The usual way of tackling the challenge

Faced with the reality of showrooming, chains have mainly responded along three lines:

  1. Penalizing showroomers when they are in the physical store, for example by not offering them WiFi or making them pay if they leave without buying anything. Obviously, this is not the most common solution nor, of course, the most suitable approach.
  2. Ensuring the exclusivity of the majority of their products. This lets them prevent other stores offering these products and stops customers being able to compare. This approach is often impossible if the chain does not have enormous purchasing power. A slight alternative of this approach involves achieving exclusivity in terms of a small variation of a model, which is given a slightly different code, thereby preventing direct comparison. If this response is feasible, it may be appropriate, but it is often not enough.
  3. Lowering prices to undercut competitors, especially those that sell online. Although this approach may improve the rate of purchase avoidance, its side effect is a reduction in gross profit and, as a result, the equilibrium point is much higher. If we take into account the fact that costs tend to be higher in a physical store than for their online competitors, companies taking this approach run the risk of making losses.

A proactive approach for city centre stores

The first part of the response is to play to your strengths, in this case, the sensory side of shopping. Turning the store into a launch pad for the imagination (e.g. as Ikea does in certain parts of its stores) and a place that inspires a particular emotion triggered by the simultaneous stimulation of various human senses. Let’s not forget here the important role that sellers play in this respect. All of this goes towards creating a packaging or micro-context, a crucially important aspect of any neuromarketing strategy, as we have seen in earlier articles.

The second part of the response is not only “stemming the tide” but rather facilitating the other part of the shopping experience: being easy to use from an operational perspective. In specific terms, this means enabling customers to access the information through various interfaces. Let me explain.

The information found on a physical label on a product is often insufficient, if the customer wants to feel more confident about their purchase. In this case, the retail chain can offer information on demand, whether that is through interactive screens activated with the product code or with a code than can be activated using the customer’s smartphone.

When the customer uses their smartphone in the store, there are two possibilities: the chain’s app (or website) opens, or this app belongs to a third party. In the ideal scenario, the customer could activate a code on the product shelf to activate a code in the chain’s own app, without having to type anything in. This would give customers more information about both the product and the additional benefits offered by the chain when customers choose to buy from them (e.g. methods of payment, delivery outside the standard timetable, extra warranty, etc.).

Ideally, when customers use the chain’s own app, it shows them something relevant or, in other words, personalized for that customer. For instance, if somebody has a baby, they could be recommended the option of a promotional pack suitable for that context. This would be a case of big data being applied to showrooming.

It is worth highlighting here that anything that reduces the effort required (e.g. easily accessible information, non-technical language, avoiding repetitive tasks such as entering personal details or customer card details again, etc) is likely to generate greater sales.

Moreover, from the same platform, all of the information could be sent to somebody for them to give their opinion, reserve the product and maybe even buy it.

As a third response, albeit complementary to the others, a sales promotion can be added that is issued to registered customers who have given permission for their smartphone to be identified. For instance, customers who spend a long enough period in a particular section of the store could be sent a digital coupon for a certain amount that is only valid for the following half an hour. Technologies such as iBeacon can help, as long as they are not intrusive; the cortex would take issue otherwise.

The result of all this is that city centre store companies have to adopt a multi-interface strategy or an omni-channel approach as it is commonly known. In fact, a more suitable name would be a fully customer-centric strategy, as it offers a complete, personalized experience that is interconnected throughout all of the interfaces.

Operating through all of the interfaces, chains have more opportunities to gather information about customers and, as a result, to general a more enjoyable, personalized and stimulating shopping experience.

John Lewis, a good example

One really good example of the integration between interfaces is the British chain John Lewis, winner of several awards for offering customers an omni-channel experience.

The products in-store have two codes: the traditional one and another in-house one. By scanning the latter with their mobile phone, customers access the product information on the company’s own app. As well as the technical specifications being provided there, customers can also see other complementary benefits that John Lewis offers customers for shopping on their website, personalized discounts generated from previous purchasing data, information on demand and other aspects that make the shopping process easier.

As a result, the chain has managed to establish itself as many customers’ preferred option, even though its prices, while competitive, are not the lowest on the internet.

Finding our bearings

The objective of retail chains is not to prevent customers shopping online, but rather ensuring that they do so using the chain’s own range of interfaces. As Ann Zimmerman (2012) says, competition is not between stores or website, but rather between your website and the rest.

Showrooming is just the tip of the iceberg that shows the deep-rooted transformation that is happening and going to happen in retail, the cause of which is the fact that customers live and shop differently now. Achieving harmony with customers’ lives should be a greater trigger for companies to transform, rather than simply reacting to a rival’s initiative.

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[1]  Context refers to the combination of a particular time and place.

[2]  For this reason, what people like most is not having to make a decision.

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Bibliography

  • EKN (2013), “The future of the store”.
  • Enright, A (2014) “U.S. online retail sales will grow 57% by 2018”. Internet retailer, 12th May
  • Internet retailer. “European E-Commerce Forecast 2013-2017”.
  • Local Data Company (2014) “Vacancy report H1 2014”.
  • Reingold, J. & Wahba, P. (2014) “Where have all the shoppers gone?” Fortune, 3rd September
  • Warc Staff (2014) “Retailers face the omni-channel gap” Warc, 18th March
  • Zimmerman, A (2012), “Can retailers halt showrooming?” The Wall Street Journal, 11th April

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Lluis Martinez-Ribes

Source: Código 84, number 183.

December 2014

Things won’t stay this way. An interpretation of Costco in Spain

On 15th May 2014, the American chain Costco opened the doors of its first store in Spain, in the former ‘City of the Image’, Seville. The store is a warehouse club, a retail format in which customers form part of a kind of shopping association.

To fill the 140 employment positions at the Seville store, “148,000 candidates applied to the selection process”, says the director of Costco Spain, Diane Tucci (Ramírez, 2014). Before opening this first store, Costco had already directly created over 245 jobs in Seville and 60 in Madrid.

That day, not only were there thousands of curious onlookers observing the aisles of enormous shelves filled with products embracing American formats, but also queues of people waiting to pay the annual subscription of €30 that would allow them to start shopping there. Even before opening day, over 16,000 people had already become paid-up members.

Image: Artchandising

All about Costco

Costco is not just any old company. In Deloitte’s 2014 league table, it ranked as the third leading retail company in the world (US$105.2 billion in 2013), with just Walmart and Tesco ahead of it. Its evolution and growth has been remarkable. Last year, it was the USA’s second biggest chain, and the sixth in the world, according to Deloitte.

James Sinegal, Costco’s former CEO, and Jeffrey Brotman, the company’s current chairman, co-founded the company in 1982. Sinegal was one of the brains and driving forces behind the concept of warehouse clubs.

On 15th September 1983, Costco opened its first warehouse club in Seattle and, in 1993, the company merged with Price Club. This union gave rise to PriceCostco, with 206 sales outlets across the USA and annual sales of 16 billion dollars. In 1997, all of the stores changed their name to Costco and, a year later, they launched their online sales platform, costco.com.

What is a warehouse club?

A warehouse club is a store of a size similar to a hypermarket (around 13,000m2) that offers a wide variety of product categories (food, homeware, electrical appliances, books, beauty, etc.), but with a very limited number of items per category. In total, they do not tend to have more than 4,000 lines of items, far fewer than an average hypermarket. Another key feature is the extremely low prices, almost at wholesale levels, as it is a no-frills store that aims to sell in bulk with margins no higher than 15%. However, not everybody can shop within this type of retail structure, only those that pay an annual membership fee.

This retail format is typically North American, with two large chains dominating the playing field: Costco, the market leader, and Sam’s Club, owned by Walmart.

The Costco formula and the challenges it presents

The definitive features of this formula are as follows:

  • Really low prices. Costco often operates with a margin of just 10% (compared to the standard 20-30%), which is not popular with some of its shareholders, who believe that prices could be raised. This fact could deepen the price war in mass market retail in Spain (and particularly in a city as price sensitive as Seville), which is still reeling from the impact of Mercadona’s latest price drop this spring. Competitors will have to be extremely creative, strategically speaking, and even more so considering that the Spanish retail sector is one of the least productive in Europe.
  • Their product range consists of known, reputable brands alongside their carefully developed own label (Kirkland Signature), which accounts for 15% of the product lines and 20% of sales. In fact, it is a ‘private brand’ (in other words, the product brand is not the same as the chain’s) but, just as in the case of Hacendado, it is linked to the brand in the customers’ minds, and it is greatly valued, with its reputation spreading by word of mouth. As such, advertising becomes less relevant.
  • The fact that the product range within a category is fairly narrow is not a serious issue, if the lines available are relevant to the customers. A number of studies indicate that this minimizes confusion and avoids the categorization effect (Mogilner, Rudnick, & Iyengar, 2008). However, as food is a deeply cultural product, Costco will have to adjust its range to local tastes, which may initially limit not only its biggest selling point but also its economies of scale, as it will have to open itself up to new suppliers.
  • A quarter of the range changes constantly, as is the case with Privalia and similar websites, in the form of special offers that are only valid for a limited period. These promotions focus on aspirational products, even to the extent of diamond rings. This involves the use of significant resources in terms of neuromarketing in retail: surprise and management of the imagination. Customers are drawn into the game of imagining what bargain they will be able to get their hands on next time they go.
  • Two segments co-exist: the main segment of the general public, plus a secondary segment of small businesses. It is no surprise that this in particularly worrying for two chains (Carrefour and Macro), as it represents a direct challenge to them.
  • In the USA, Costco sells to customers with higher purchasing power that Sam’s Club. In Seville, they will be faced with an official unemployment rate of 35% and a population that have become a lot poorer as a result of the economic crisis. In many countries facing economic difficulties, the public tend to buy in small amounts (for instances, two cigarettes), despite the unit price being significantly higher than if they bought in bulk, such as the formats sold in Costco. Nevertheless, there is the option of sharing a box of twelve units among several people.
  • It takes great care of its clientele (facilitating the returns and complaints processes) and its employees, with salaries and benefits above the sector average. This policy was promoted by Jim Sinegal, who was convinced that paying workers well was a key factor of successfully executing Costco’s strategy (Thomson, 2009).
  • This is not a matter of a type of store, but rather a business model. Costco earns 75% of its profit from its membership fees and 2% from its turnover, above the net margin of many Spanish retail chains. In other words, it starts the financial year with most of its profit already earned.
  • Paying for the ‘right to shop’ may seem like an obvious obstacle to success, but the practice has two benefits: a) It differentiates the store from the crowd, helping to overcome the great similarity that reigns in the sector; b) If a customer pays to shop, this membership fee becomes a stimulus to go back: “I have already paid, I should take advantage of it”. There are two facts that validate this theory. Firstly, in the USA, the membership renewal rate is 90%. Secondly, Amazon Prime increases sales to customers who have paid for that service.
  • However, front end cannot work with out an effective back end. Costco asks Spanish suppliers to adapt to the American way of doing things and, in some cases, different product formats. This results in inefficiency, complexity and, therefore, additional cost for suppliers, who have to work out whether it is worth bearing this extra burden for the chance of having a customer of this scale.

Costco is not an opportunistic company, but rather it steadily opens stores on a constant basis, with a long-term strategy, allocating resources wherever they may be needed, and with a great deal of patience. The initial losses that the company will face in Spain, due to its learning curve in a new market, are unlikely to concern the company’s executives in my opinion, or even Wall Street. At the heart of the matter, Spain is a rolling target, a step on route to the overall goal of Europe.
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Bibliography

Mogilner, C.; Rudnick, T. & Iyengar, S. (2008) “The Mere Categorization Effect: How the presence of categories increases choosers’ perceptions of assortment variety and outcome satisfaction” Journal of Consumer Research, Vol. 35: pp 202 – 215.

National Retail Federation (2012) Top 100 retailers 2013.

Costco’s website: www.costco.com / www.costco.es

Ramírez, V. (May 2014), “Costco inaugura su primer centro en Europa”. Available on: diariosevilla.

Thomson, A. (2009) “Costco Wholesale Corporation: Mission, Business Model and Strategy”. McGraw Hill Case Studies.

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Lluis Martinez-Ribes

Source: Código 84, nº 180.

TO BE TAKEN ONCE EVERY THREE YEARS. Interpreting Euroshop 2014

If you are interested in retail, at some point, you are sure to have made a pilgrimage to Euroshop, the first-rate international trade fair held in Düsseldorf every three years. Which gives us an opportunity to take the pulse of international retail.

With the sector currently in the throes of a profound transformation, perhaps comparable to the introduction of self-service, it may well be a good idea to share our feelings about this year’s edition (from 16th to 20th February). I use the verb ‘to feel’ because it is more inextricably linked to the brain than verbs such as ‘to see’, ’to hear’ or ‘to touch’.Consolidated aspects

 

To understand what is going on now, one method that is often useful is comparing the latest developments with trends that were detected some time ago. We can then identify aspects that were previously at the embryonic stage that have now matured. Take these four examples:

  1. LED lighting is no longer a left-field sideline, but rather a mainstream leader in terms of the majority of uses. It has advanced so much technologically that many of the technical obstacles have been resolved and its price has been kept lower. Its ascendency not only improves sustainability in environmental terms, but also economically. The lower consumption it offers is a key aspect, as retail businesses tends to consume high levels of electricity.
  2. Another former newcomer that is now a big league player is the multimedia screen. Not only has their definition been enhanced and their price lowered, but they have also spread throughout all areas. Ranging from screens with simple one-way communication with the customer to those showing information about the display, and from functional screens to those used at the checkouts, their interactive use as touchscreens is now omnipresent.
  3. Another factor that has been consolidated is the multisensorial aspects of physical stores. It seems that, finally, even the discounters have realized that beauty sells. I have seen a new model of the Primark store that is more pleasant and looks less like a cold warehouse. The results can be huge when all the senses are integrated with a blend of the lighting arrangement, textures, sounds that are more than suitable for a public place, and smiles on the faces of the sales assistants. Aromas still remain somewhat of an untamed beast, as I am yet to see them reined in and used in a controlled way.
  4. Back-office tools have taken root and spread like wildfire, attracting a significant amount of interest from visitors. Retail requires large helpings of productivity, functionality, rigour, automation and cost control, although these aspects are not witnessed by customers. Fortunately, there are several companies that take on these challenges. Such aspects include fraud prevention, semi-automated picking carts for internet orders, more sustainable refrigeration systems, performance monitoring, IT integration, etc.

The next big thing

Certain other aspects are all set for generalized adoption, such as the following three features:

  1. The growing presence of NFC technology continues to spread throughout more areas. However, it does not yet seem to have reached critical mass (or the famous tipping point). Nevertheless, it can increasingly be found in more and more places, applied to makes payments easier.
  2. Another aspect that is primed for take off in terms of retail is virtual reality, above and beyond its use solely for entertainment, as a practical tool for enhancing customers’ imagination by helping them to visualize the end result of their purchase.
  3. Customer traffic counters are now all set for widespread implementation, whether this involves sensors that detect the movement of human bodies or, more efficiently, antennae that capture smartphone IPs. I would predict that the latter system would see the biggest growth. In both cases, privacy is guaranteed and we can learn how customers interact with the store.

Newly emerging trends

Certain aspects, such as the following pair, were practically nowhere to be seen in the last edition, three years ago:

1) Multi-channel has a strong presence and is widely discussed. In fact, it has steadily become the main ‘hot topic’ at international retail congresses over the last three years. Complete hardware and software solutions are now on offer, which enable customers to buy a product that is not currently available in stores. Alternatively, they can order from the comfort of their sofa using their tablet (e-shop).

However, I get the sensation that this multi-channel approach is generally conducted from the physical store, rather than placing the customer at the centre. For instance, there were a lot of interactive screens to be used in-store, as though they were large tablets.

But there were not many solutions to be seen that are developed from the starting point of the customer looking for a piece of furniture on the internet, for example, who then checks it out at the store before finally making the purchase away from the store.

2) One of the biggest surprises has been to see how several companies are playing a type of ‘game of Lego’, mixing various pieces, none of which are new, but which, when arranged together, achieve some really interesting results. For example, resolving a key challenge: how can customers get more detailed information, when they want it, above and beyond the simple trinomial of brand, model and price. This has been achieved in an extremely practical way by interlinking elements from very different sources: sensors (RFID, movement, etc.) placed on products, multimedia screens on the displays, databases with multimedia content, social networks and e-mail connections, links with the CRM for the customer card, in-situ payment methods, etc.

 

Shared concerns

On the flight home, two main doubts came to my mind.

The first was a concern that, with so many tools to grab attention at the point of sale, are we not in danger of tiring out the cortex, creating an ‘enlightened commotion’, a more attractive sensory contamination, efficient at that instant but ineffective in the long run?

Research has shown us that customer loyalty is achieved more through the reduction of effort than the ‘wow’ effect (Dixon, Freeman & Toman, 2010). We also know that the human brain is suited to habits and making non-conscious purchase decisions. Not much has been seen from this perspective.

The second concern was that, with amazon.com making headway in so many sectors, as invisibly as it is convincingly, is it not the case that Euroshop and we ourselves are focusing too much on improving physical stores, rather than creating On-Off type integrated systems without gaps? The online sales departments of retail chains will probably tend to vanish from the organization chart, to become just another service offered by the store.
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Bibliography

Dixon, M.; Freeman, K.; & Toman, N. (2010) Stop Trying to Delight Your Customers.
Harvard Business Review. July Issue.
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Lluis Martinez-Ribes

Source: Código 84, nº 177.

THE AIM OF RETAIL INNOVATION

Image by artchandising

Retail innovation is an extremely hot topic. These three examples speak for themselves:

  • A group of experts in retail innovation, of which I form part, received a request from the European Commission for measures to promote this type of innovation across Europe in 2013.
  • The last two editions of the Esade programme “Three and a half days’ immersion in retail innovation” (2012 and 2013) welcomed executives from Australia, Korea, China, Switzerland, the UK, the USA, Poland, Spain, Argentina, Puerto Rico and Guatemala.
  • A Google search for the term “retail innovation” generates 130 million results.

What is all the fuss about? What is this famous retail innovation actually for?

What innovation isn’t

Innovation is not administration. Innovation is not about keeping business neat and tidy. Innovation is not a question of improving what currently exists. Innovation is not about reducing the company’s weaknesses nor enhancing its strengths. Innovation is not improving efficiency nor winning the game. Innovation is not a matter of obeying the conclusions of a market survey, nor jumping on a bandwagon. Innovation is not a case of detecting and implementing a “best practice”.

What innovation is

Innovation is an exercise of creation, creativity and transformation of the present reality. Retail innovation is inventing a piece of the future that does not currently exist, designing a new way of shopping and changing the rules of the game. Innovation probably involves creating a new trend. Innovation is conceptualising and launching a “next practice”.

The process of retail innovation

Innovation is not usually the fruit of a single isolated moment, but rather a lengthy process (normally lasting several months) with the objective of achieving a more effective kind of retail. In a market economy, the paradigm of effectiveness is achieved when a customer chooses your store on a constant basis and you are able to benefit from their preference.

From my experience, I have witnessed that this process usually develops best with compact groups, with a heterogeneous mixture of internal and external professionals, with specialists from a remarkably diverse range of disciplines (psychology, biology, neuroscience, sociology) being inserted on a temporary basis. The process is firmly rooted in the customer insights detected in qualitative market research, normally involving projective techniques. Statistically-based surveys does not help to innovate, but rather to monitor an evolution.

The Board of Directors or the CEOs usually get the ball rolling in terms of the process and then provide support later on with decision-making. Without leadership and the explicit conviction of senior management, the process may end up in frustration. This is the reason why the retail innovation programmes at Esade are aimed at decision makers.

Two routes towards innovation

There are two main ways of innovating: technology-driven and customer-centric.

The technological route begins with the identification or possession of a particular technology, followed by thinking of ways to apply it. For instance, developing ways of capitalising on the fact that every smartphone has an IP address, which acts as a sort of registration number.

The customer-centric innovation route takes its inspiration from certain problems experienced by particular customers in order to invent a new way of shopping. To make such an idea a reality, we then search for the appropriate technology. This second route is certainly not averse to technology, as technology enables the solution.

Berger and Bray (2008) demonstrate that customer-centricity and the attempts to improve the shopping experience are powerful differentiation tools.

Whether it goes by the name of “user-driven innovation” (Breuer and Ketabdar, 2012) or “customer-centric open innovation” (Steinhoff and Breuer, 2009), there is an ever-growing number of experts who define a customer-focused approach as one of the main driving forces behind retail innovation (Sorescu et al., 2013). Personally, this is the route that I find most convincing.

There are two parts to retail

Every retail business model consists of two parts: the part that the customer sees (front-end) and the other behind the scenes (back-end). The latter provides support to the former.

The front-end includes the store (physical or digital), the shopping experience, the product assortment, the services, activities, prices and so on. The back-end consists of elements such as the IT system, logistics, talent recruitment and retention, the suppliers relation’s strategy, the performance monitoring system and so on.

Retail innovation can take an incremental form, applied to a small part of the purchasing process (e.g. incorporating new payment systems). However, the most transformational and effective innovation occurs when the purchasing process is re-engineered, affecting both the front-end and back-end (creating a new retail concept).

When applied to the back-end

If innovation is applied to back-end processes, its purpose is to increase efficiency and productivity, accelerate processes or reduce investment and costs.

The focus in this case is clearly quantitative and it must be designed and implemented by people with the appropriate competencies required in such matters.

For example, innovation based on predictive analytics, taking advantage of big data or data crunching algorithms, is set to be increasingly common in retail companies, as such companies generate immense volumes of data related not only to products but also to people, contexts, etc.

When applied to the front-end

From the customer’s perspective, every purchase is an exchange. They receive a solution (product or service) in exchange for certain efforts that the customer does not like making, but they feel compensated for.

These efforts include all of the bother, problems, concerns, distress, activities and “pains” (including payment) that customers must endure in order to obtain the desired solution.

For instance, the customer’s efforts may involve going to the store, getting there before it closes, parking, finding what they are looking for or asking for assistance, paying and taking the goods home. There are other, sometimes invisible, efforts such as feeling lost or ignorant during the purchase.

Even e-stores involve their fair share of efforts for customers to bear: registering, reading and accepting the purchase terms and conditions, verifying that they are real people by typing strange combinations of letters and numbers, waiting for the order to arrive, etc.

When the efforts that customers have to make when shopping are reduced considerably, they experience a significant increase in their quality of life at that moment.

If innovation is applied to front-end, its main purpose is to provide customers with a substantial improvement of their quality of life when shopping.

The customer’s quality of life does not only improve when they are in the store, but also before arriving and after leaving. The purchasing process, as it is known, involves much more that simply what happens in the store.

From the company in retail

If what the customers experience in the front-end is a more human, emotional and simple way of shopping, the result will be that the store (or e-store) will achieve the customers’ sustained preference (which translates into sustained or increasing cash-flow) and greater profitability (improved gross margin) because customers lower their less price sensitivity.

This is precisely the financial and economic motivation behind the decision of companies in retail to innovate.

There’s talent outside as well

In order to be able to conduct this kind of transformational innovation, it is vital to have true partners that are highly capable, whether they are product suppliers, service providers or external specialists.

Embarking on such a process with only internal resources does not provide the necessary level of heterogeneity and wealth of perspectives, nor does it ensure the diverse competencies required for inventing and creating this piece of the future.

For instance, what would the level of innovation be in Mercadona if it were not for their related suppliers?

In conclusion

Retail innovation inspired by and focused on customers in like a new tree that sprouts from the ground.

It is firmly rooted in empathy, feeling what the customers feel (even though they may not consciously perceive it). The fertiliser that encourages the tree to grow comes from creativity, imagination and leadership. The fruit of the tree is enticing, both for the customers (better quality of life when shopping) and the company (sustained preference and profitability).

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Bibliography

Berger, D. & Bray, J. (2008) “Retail Innovation: The never ending road to success? A critical analysis of pitfalls and opportunities” European Institute of Retailing and Services Studies Annual Conference, 14th-17th July 2008, Zagreb.

Breuer, H. & Ketabdar, H. (2012) “User-driven business model innovation: new formats and methods in business modelling and interaction design, and the case of Magitact”. IADIS International Conference e-Society.

Sorescu, A., Frambach, R. T., Singh, J., Ragaswamy, A. & Bridges, C. (2013) “Innovations in Retail Business Models”. Journal of Retailing. Vol. 87, Iss.1, p.3 – 16.

Steinhoff, F. & Breuer, H. (2009) “Customer-centric open R&B and innovation in the telecommunication industry”. Proceedings of the 16th International Product Development Management Conference on Managing Dualities in the Innovation Journey. Twente, Netherlands.
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Lluis Martinez-Ribes

Source: Código 84, nº 175.

GROWING CUSTOMERS. Key metrics in retailing

Image by artchandising

I was a good kid, I used to do my homework, I ate everything my parents give me and I didn’t break too many things, so my parents give me a bike. I spent hours and hours on it with a boundless thrill. I only had dreams about the disappearance of those two small lateral wheels that stabilize the bike; they showed my inexperience.

My grandfather decided to teach me. He took the “orthopedic” wheels out and we went to the street. In a broad sidewalk from an avenue, he -with infinity patience- hold the seat while I was pedaling. My instinct made me look at the potholes and obstacles in the pavement closer to the front wheel, so I could try to avoid it. Nevertheless, he told me “look forward, look far away” with the same persistence as I disobey him.

Tired of my procedure, he stops the bike suddenly and told me in a serious tone that either I paid attention to him, or he would stop teaching me. Only with the though of the embarrassment of having to need again lateral wheels, I decided – against my own logics – to obey him.

After two minutes I heard his voice far away: “ You are doing it very well!”. I had learnt.

Traditional metrics

Retailing is an activity where, as you can get an immediate feedback to the decisions you make (for example, you only will need little time to observe if a certain product presentation works or not) the risk is to practice this profession looking only to the front wheel, in a short sightedness way.

Probably one of the most common metrics in retailing, no matter what the sector or country, is the average ticket value; the average amount of the transactions. I had been working with retail for more than three decades and still today I haven’t found any executive that doesn’t know this indicator by heart.

Of course, everybody also know the period sales, the turnover relative to the same period from the previous year, and the deviation from the budget.

All these indicators have the advantage that there are very easy to obtain and use. But, they have a disadvantage: they show the business as a sequence of pictures, instead of dynamically, as a film.

Most of the retail companies (e.g.: a supermarket, a bank, a hairdresser, a cafeteria, a boutique, an online store, or an airline, etc.) don’t look for a person that only comes and buys once, but for a person who becomes a regular customer or even a fan.

And traditional metrics doesn’t have this long term approach in their DNA.

In the long term

If a customer’ who spends every week 50 € in our shop, gets angry and doesn’t come back again because we haven’t attended his/her properly, the so called common sense tells us that we lose much more than 50 €. However, How many times we have seen or suffered that myopic management strategy, claiming that a customer wasn’t right with his/her complain!

Attending a complain – fertilizing the customer – is similar to a bank that invest giving a credit, with the hope that they will obtain a benefit from it due to the following regular returns. To calculate it there is a formula, the Net Present Value (NPV), that you could find prefabricated in regular spreadsheet templates.

Kotler (1974:24) defined the probability of having a customer in the long term as the present value of the future expected benefit along a temporal horizon of transactions with a given customer.

The value of a customer in the long term

The “value of a customer in the long term” (Customer Lifetime Value, CLTV) is a formula focused on knowing how much each customer is worth, in euros or in any currency.

The CLTV is a way to measure the present value from the future cash flow attributed to each customer purchasing pattern. It allows you to know how much money a customer’ could achieve to provide in the future, if he/she remains with the same shopping patterns as up to now.

The first time that the term Customer Lifetime Value appeared in a publication was in Shaw & Stone book “Database Marketing” published in 1988, that includes multiple examples.

It could be used at one customer level, but also at a specific customer’ segment level; for example the ones with more price sensibility, more time sensitive, or ones who go to the mall shops, etc.

Obviously there is a need for retail companies to know shopping behavior at individual customer’ level. It is one of the main aims of the “loyalty cards”. Besides it is not need to have a plastic card, but any kind of method to identify what a customer’ does.

The main advantage of CLTV in front of traditional metrics is that it allows us to obtain a long term view of the relationship between the customer and the company, and in this way be able to make strategic decisions.

Traditional metrics CLTV
Characteristics It is like a static picture from a specific moment.
Short term vision.
It has prospective pretensions.
Long term vision of the activity and commercial relation.
Functions Detects the current results evaluating customers through its current behaviour. Value customers through how much they will give, taking into account attraction and retention costs.
Usage Useful in the operational decision making that needs to be done quickly.
Easy to understand by everybody from the company.
Useful in planning decision making in the long term.
Also used to decide either to invest occasionally in a customer or not.
Scope Usually are aggregated data. It could be used in aggregated way, but is ideal at individual customer level.

Thomas, Reinartz & Kumar (2004) analyzed the behavior of a group of customers’ during 3 years. They observed that the bigger segment was the one with the most easy to acquire and retain customers’. Those represented the 32% of the total amount of customers, but only gave the 20% of the benefits. On he other hand, the 40% of the benefits came from the 15% of the customers’, the smallest group, hard and difficult to capture, but easy to retain if you give them what they need.

Who wants to apply that metric could make a simulation at this Harvard B. S. web page.

The whole formula can be downloaded in a spreadsheet format at this Harvard B. S. web page done with the collaboration of Microsoft.

Implications

I haven’t met yet any company in retailing who says that it is not or would’t be customer-centered. However, in practice it seems to me that most of them knows more about product category than about customers. Most of them have executives responsible for managing the different product categories or chains, but I have seen very few that have “customer managers”.

The philosophy behind this metric is double:

  1. As the company life off customers, they have to be the center.
So they have to be understood, observed and measured.
  2. Economic sustainability doesn’t come from a “buck”, neither from promotional pressure, but making customers to come back. So, metrics that takes into account such dynamic approach in a long term, have to be used.

Companies in retail (also most of the other) have to see themselves as “customer farmers”, as “growers” not of pears but of customers.

A new customer is a seed to take care of, that it gets seeded (attraction costs) is irrigated and fertilized (maintenance costs), with the intention to bear fruits (what they buy, the quantity, the frequency and the margin).

If retail companies sees themselves as “customers growers” most of the interdepartmental conflicts will disappear, and the most important: customers will feel more empathy from the retail chain than they get from a 3×2 promotion.

Bibliography

Kotler, P, (1974), Marketing during periods of shortage” Journal of Marketing, Vol. 38, Issue. Summer, pp 20-29.

Shaw, R. and M. Stone (1988). Database marketing, Gower, London.

Thomas, J. S.; Reinartz, W.; & Kumar, V. (2004) Getting the most out of all your customers. Harvard Business Review, Vol. 82, Num. 8, pp: 116 – 123.

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Lluis Martinez-Ribes

Source: Código 84, nº 173.

A GUILD-BREAKING RETAIL FORMULA. An interpretation of Cookiteca

Image provided by Cookiteca

It is 5.30 on a Friday afternoon. After hanging up their coats, and carefully washing their hands, 15 children excitedly open their eyes as they enter a kitchen larger than the front room of their homes. There was a rising crescendo of murmured admiration. One of the children, Julia, has invited the others to celebrate her birthday. However, this was not going to be a conventional birthday party; rather they were going to have fun learning, and then eating, a cake. Hopefully, there will be enough left over for them to take samples home to show their families.

The party was taking place at Cookiteca, a new business that is hard to define yet easy to understand and love. This Barcelona-based firm is less than 30 months old, yet it has already opened four locations and served more than 11,000 clustomers. The firm is managed by the two partners Sílvia Mirabet and Neus Canal.

When Neus describes the business she uses different ways according on who is he addressing. She tells suppliers that Cookiteca is a cooking course centre and a shop. However, she tells prospective clients: ‘Cookiteca is a place where you can enjoy cooking and have a good laugh’.

History

Neus is an architect, entrepreneur, and business consultant. I met her when she came to visit me at ESADE to discuss attending a 3.5 day course in retail innovation. Registration for the course would cost €3000 and it was clear that she wanted to make the very most of her time and money. I was delighted with her vision and focused energy.

Cookiteca began in January 2010 when Sílvia, a cooking lover, asked Neus for advice about a business concept based on cooking. The idea hinged on the fact that it was easy to find cooking courses, but very difficult to find utensils and ingredients. They founded the business in May and opened their first location four months later in an attractive building in the traditional neighbourhood of Sarrià in Barcelona.

On entering Cookiteca and seeing a display of semi-professional cooking tools you might feel that you had entered a rather stylish kitchen utensil shop. To one side is the reception desk that doubles as a cash desk. Enter a little further inside and you will find an area displaying utensils and ingredients for making desserts. This area leads on to a very large and well-equipped kitchen where cooking classes are given. But it does not end here, further on there is a room with a large table where participants can taste what they have just prepared. On their way out, participants can buy some of the more unusual ingredients used in the class.

This is a guild-breaker retail formula: it is simultaneously a kitchenware store, a specialist bookstore, a cooking school, a restaurant, and a grocery. And sometimes it is also an event planning company, whether it is for individuals or companies.

Who does Cookiteca serve?

One of the strengths of the business is the diversity of segments served. The business aims at three segments – although never simultaneously:

  • Adults interested in cooking
  • Event planning businesses where the kitchen plays a leading role
  • Children

There is a growing public interest in cooking. According to Neus some 20% of people who could cook do not know how – and there are many others who want to expand their abilities by learning a manual skill that is unrelated to their professional work. Neus says that by learning a new skill people gain more self-confidence and escape from daily life tension.

Activities range from a basic healthy cooking course to more skilled and fashionable courses – such as backery. The usual price of registration is between €35 and €45.

Part of its activity is B2B rather than retail. Cookiteca sells active kitchen-based events to local companies: such as cooking demonstrations and tastings. The firm has a psychologist on call who helps clients design specific events.

But it is children who have made Cookiteca famous and remain a vital segment. Children (who must be older than six to follow and enjoy the learning dynamics of the classes) always have plenty of fun cooking and many develop latent abilities. Their self-esteem is also given a boost when they return home with something they cooked themselves. The children make Cookiteca a happy place, and have quickly spread the word about Cookiteca around Barcelona.

In addition to the scheduled courses, various other events and birthday parties are hold (with cooking always as the main event). Self-catering courses for children are organised during the school holidays. The children arrive early in the morning, prepare their breakfasts, eat together, go grocery shopping at the local food market, attend an external workshop, return, then prepare and enjoy lunch together before going home. The course serves as a rounded experience in cooking and working together – while having fun.

Offline and online combined

The company web plays a key role in creating awareness and marketing the cooking classes (25% of places are booked on the web). It is also increasingly used for selling other products.

Cookiteca has not yet offered what will become the main digital interface, a smartphone app, and for the moment the business remains a good example of a start-up that is not technology based.

The current revenue pie shows 35% earned from cooking workshops, and 65% from shop sales. The partners aim to balance both items and expect to reach breakeven soon.

Image provided by Cookiteca

More than cooking

Neus is clear that she does much more than co-manage a cooking school.  She is establishing Cookiteca as a strong brand with humanist principles. Neus says the company emphasizes the role of good cooking for well-being, and maximises the fun inherent in group learning.

Brand building, explains Neus, is more important than aggressively aiming at short-term profit.

There are two essential elements for building the business:

  1. A competent and enthusiastic team – perhaps the most difficult element to achieve in a retail model.
  2. A suitable building as “package”, Neus says locations must be: cosy, authentic, practical, inexpensive, and undecorated. The food, she says, tends to provide the colours needed.

My six tasting notes:

My tasting notes for Cookiteca suggest that the business leaves the following after-tastes:

  • 1. Cookiteca offers a retail model that understands the economic reality in the street, and treats customers as people.
  • 2. Cookiteca has devised a solution tree, with a common trunk (the love for cooking), but with different branches yielding in an unique and intense experiences as fruit

⁃ Using a mixture of products, services, and activities;

⁃ Combining products usually found in very different sectors.

  • 3. It is a business model that serves different segments at different moments – but never simultaneously.
  • 4. Cookiteca knows how to answer the question that I usually put: ‘what do you mean in my life?’ Cookiteca is a place where I can meet with other ‘foodies’ like me.
  • 5. Improvements will come from a better fit between the three dimensions:

⁃ Solution portfolio

⁃ Segments

⁃ Locations (including the online shop)

  • 6. Despite requests and having prepared some documentation, Cookiteca does not yet wish to franchise the business because the founders feel that further fine-tuning is needed. Franchising means offering the franchisee a reduced risk of failure, and Cookiteca wants to improve their model first. This is a good example of an ethical business philosophy.

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Lluis Martinez-Ribes

Source: Código 84, nº 169.

CHOICE: PICTURES IN AN EXHIBITION. ‘Curation’ in retailing

(Images: artchandising)

In 2012, many pharmacies in Spain have drastically reduced their inventory. The Government, their main customer, accounts for over 70% of sales and is not only negotiating lower margins but also paying later and later.

Keeping stocks down is very appropriate in financial terms, but not necessarily in terms of the impact on customers, who see how their usual pharmacy has become less convenient:  many products have become available only upon request and customers must return another day to pick them up. Product presentation has also become less attractive.

Such inventory decisions are common in retail. Mercadona, for example, significantly reduced its range in 2009.

This topic has enormous scope, affecting not only the financial and commercial aspects of an organisation but also the management of complexity within it (purchasing, logistics, and training, etc.). Put another way, it directly affects the balance sheet, the Profit and Loss account and the overall competitiveness of a retail company.

Tools for the assortment policy

It is well known that assortment in a retail company has two variables: breadth and depth. The first refers to the number of major product categories that a store (physical, web or app) makes available to the customer. The second refers to the number of options that the store offers within any given category (for example, the number of kinds of milk on sale).

By playing with these two variables one can describe many retail formats. A convenience store, for example, is characterised by offering a broad but shallow choice: a little (usually only best-selling products) of a lot of different categories. In contrast, a specialist shop offers many options (depth of choice) in only a few product categories, aimed at many different kinds of customer.

Several methodologies have been used, such as “efficient assortment” or “category management”, which has been promoted by AECOC* for years. Their usefulness is high when it comes to improving or adjusting an existing situation, but is nevertheless low when it comes to creating an innovative retail formula.

(*) AECOC, Spanish Association of Commercial Coding (Asociación Española de Codificación Comercial

On the other hand, the method by which category management has been actually carried out has led to it going into a steep decline, at least in the mass market sector. Suppliers led, developed and funded while those directly concerned, the retail chains, went about making range decisions using different criteria, not always in line with the patterns of their suppliers.

As a result, the current playing field presents a remarkable challenge: choice, a crucial element in commercial and financial policy, is addressed in a disorganised manner.

Customers change their preferences for both type and amount (for example, ‘three for the price of two’ promotions no longer seem to work as well as before), suppliers want to launch new products, but the likelihood of achieving sufficient market coverage is very low and retail not always are in tune with the customers or with the suppliers.


Academic studies

There have been numerous studies which have shown that an excess of depth of choice does not usually create a better quality of life for customers but instead generates more complexity, more doubts over what to choose… and ultimately less revenue, as noted by Prof. Barry Schwartz in his book, ‘The Paradox of Choice,’ 2003.

A study carried out by Sheena S. Lyengar (‘The Art of Choosing,’ 2010) looked at the reaction of supermarket customers faced with two alternative choices of jam.

The largest number of products attracted more customers (fascination effect), but  resulted in fewer sales. The human brain does not like complexity, doubt,  or paying conscious attention to things. Aspects such as these represent effort and aggravation in the purchasing process.

This finding is especially relevant since, according to research by Dixon, Freeman and Toman,  reducing the required effort creates more loyalty customers than, for example, giving them a fascinating shopping experience.

As Prof. Bran Wansink (Cornell University) noted, Costco in the USA has only 4,000 items in its range. The lack of choice is deliberate: “We’ve chosen for you,” says the chain.

The compass points towards the customer

The current challenge of choice, especially as applied to moments of innovation in retail, can be solved better if we start not from our current assumptions but from customer-centricity.

More specifically, a new approach is born if you start from a very simple question:

  • Shop, what do you mean to my life?

In other words, what is the shop to the customer? And also, what is the shop to the customer? Note that we are not using the verbs ‘to do’ or ‘to have’ but others: ‘to be’ and ‘to feel’.

One task that can have a high impact on a retail business is known as to edit. Once common in fashion retail, it can now be found in any sector.

To edit involves devising the sense that a given choice might have, through items provided by different suppliers.  It’s like composing a musical score using notes provided by third parties.  For example, designing a collection of accessories that expresses a Mediterranean character from a selection of existing items from various suppliers.

This type of activity is typical of a curator.

This rol is key to any museum exhibition,  the curator determines the sense of the event by choosing works that he or she did not personally create. The curator will also arrange and sequence them according to his or her determined criteria. As a result of the work of the curator, visitors will enjoy a consistent experience full of emotions and perhaps of learning, achieved in a chronological sequence, as a vivid storytelling.

One example is that which Gary Friedman, President of Restoration Hardware, cites as the company’s philosophy of business and, as such, of choice: “When we fearlessly fight for what we believe in and remain hopelessly optimistic about life, love and the future, we create an authentic connection with all in our path. Most importantly with ourself.”

Another example is that of Ferran Amat, owner of the iconic shop Vinçon in Barcelona, when he cited falling in love with products as a criterion for choosing them. In an interview he said that they were all products he would have in his own home.

The Curator

This term reflects its etymological origin in Latin, curare (to care for, to worry about); that is to say, those who are responsible for a matter or process, having talent, subject knowledge and management ability.

This role is now more relevant than ever in a retail company because we live not only in the information society but also with the burden and oversaturation of inputs with the associated risks of lack of attention and mental distraction of customers.

In short, adding more and more items is not necessarily the answer. The customer ‘reads’ and understands choice on a non-conscious level. I have no doubt that assortment communicates more and better than posters, displays or ‘stoppers’. Because it does so intuitively.
But for choice to communicate and sell efficiently, I propose the following three steps:

  1. Inspire yourself with the answer to the question, “Shop, what do you mean to me?” Answer if possible without using the usual topics: price, product, quality, service, location etc. Here the role of curator is essential, because it is the source of the assortment policy: to select the right products for the shop. The result will be an “edited” choice, which logically must be in tune with the shop as a brand.
  2. Organise assortment — and as such the layout of the shop floor — based around a well thought out  Semantic Structure of Assortment: a type of tree of consecutive criteria, grasped intuitively through empathy with customers. It’s not recommended to ask them directly via market research; it would be paradoxical to use a conscious method to understand an implicit process.
  3. Express it in a way that does not create chaos or visual pollution in the human brain. To do this, it is helpful to visualise the subcategories so as to highlight the most relevant in terms of what was mentioned in step 1.

In this way, choice will be in tune with customers. They’ll feel good about what they experience in the shop and of course about its functionality.

So, the breadth and depth of choice in an innovative shop — or at least a differentiated one – will be the result of a kind of philosophical human process; … and therefore very commercial.

Customers aren’t robots with wallets, but people who live their lives in the most harmonious and positive way possible.
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References (by order of appearance)
Schwartz, Barry. The paradox of choice: why more is less, 2003, Ecco edit., ISBN 978-0060005689

Iyengar, Sheena. The art of choosing, 2011. Twelve Edit. ISBN: 0446504114

About Costco:

  • cnbc.com
  • Dixon, Freeman & Toman, “Stop Trying to Delight Your Customers”, Harvard Business Review. Agosto 2010.

About Restoration Hardware:

About Vinçon:

  • obsmurcia.es

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Lluis Martinez-Ribes

Source: Código 84, nº 167. December 2012

INNOVATION IS ALSO IN FASHION RETAILING. Interpretation of Victorio & Lucchino Men

Image: inside the store (provided by the company)
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On September 20, Victorio & Lucchino (V&L) established its first shop for men in nr. 28, Lagasca Street in Madrid. The inauguration made a splash in the media and in the public. The Spanish real-life magazine Hola.com made the event its main story: “Victorio and Lucchino open a store for the XXIst century man”. The reason is simple: it profoundly reshapes the shopping experience, in such a way that from now on, plenty of men shall feel relieved when outfitting for the coming season.

The essence of the Victorio & Lucchino brand

In the late 70s, José Victor Rodríguez and José Luis Medina joined efforts to create a brand, which has become over time one of the most representative and high-profile in the Spanish fashion industry.
When designing garments, they become inspired first by their homeland roots, which they then deconstruct and project into the future. They do so with a style that identifies them: aspirational, determined, seeking both perfection and good taste. Lastly, they add “a wink”.

What their garments’ label used to claim isn’t pure coincidence:  “40% love, 25% charm, 35% joy”.  V&L soon became a leading brand among women.

However, after reaching a strategic agreement with the company Manufacturas Andreu in 2010, V&L took on the challenge of selling directly to men. For over a decade, this partner had been supplying V&L its line of  fashion accessories.

Together with the key executives of the firm, Andreu and Xavier Aspa, we started devising the new retail formula by the end of the year.

Inspired by men

The company is clearly customer-centric. From the very beginning of the project  it was crystal clear that the retail innovation should be grounded in the understanding of the -not very passionate- relationship between most men and fashion.

The insights gathered in qualitative market studies indicated that in general, the male population regarded clothes shopping for a particular context (professional or leisure) an unwelcome chore, namely because it requires, at least, three kinds of efforts: it is time-consuming, coordinating clothes is challenging and, finally, trying them on is a hassle.

Therefore, the V&L concept was thought up to provide a greater life quality to those men who value a classy look according to their personal taste, and with a little mischief.

The playing field

At the time the project was being conceived, we saw that the fashion retail sector was undergoing radical changes, particularly in three areas:

  • Consumers have increased their expectations regarding product, services, price and environmental impact.
  • At an economic level, there’s economic instability, demand has decreased and margins are dwindling.
  • Digital technologies are becoming ever more available, thus allowing for new online purchasing habits.

More and better of the usual methods are no longer enough: new, innovative retail business models are called for. This is not meant to be trivial, but an entrepreneurial must.

The team was absolutely determined about one thing: we shouldn’t only create a shop, but a new retail formula, devised in such a way that it would attract customers back again and again. For this purpose, it was necessary to ground the purchase experience in these two axis:

  1. The shop should reflect the values of the V&L brand, its creativity and magic. The setting would be essential.
  2. The shopping experience should be empathic, smooth and customised. New and powerful technologies were called for, subtly inserted in the shopping process, heavily supported by the back-end and leveraging on cloud computing.


Image: inside the store (provided by the company)

The setting and its technologies

The shop has 150 m2 distributed in two floors, with a very high ceiling.

The ground floor represents a spacious living room, expressed with the particular imagination, style and liveliness of the two Sevillian designers. The products are displayed therein, separated by user context. There is an area dedicated to formal wear for work, another one for casual moments, and a third with a rather more country touch.

The shop maximises customer convenience by tailoring their shopping experience and reducing their efforts in a fun way, namely through two steps: the Pinpoint and the Canvas.

The Pinpoint experience

New customers are invited to enjoy the service of diagnosing their aesthetic preferences in the PinPoint area, a little study which reproduces the designers’ atelier.

There, customers can find out -with the help of a tablet and a stylist- what style matches their personal taste best for every context (work and leisure). Later, their body measurements are taken.

All this information is stored in the cloud for when it may be needed again. This way, return visits will take significantly less time (it won’t be necessary to start from scratch) and shall even be more accurate (the computing system knows the customer’s taste and updates it with every new purchase).

The Canvas revelation

Once the profile has been outlined in the PinPoint section, the customer is ushered to the Canvas, a 40’’ multi-touch table-tablet standing in an iconic space within the shop. There, and guided by the sales assistant, the machine proposes three outfits, taking into account the personal preferences and what they are needed for. The customer himself can also handle the oversized tablet in order to adjust the results.

The program can also recommend other combinations on the basis of a given garment the user might have selected, as it is capable of recognising every item in the shop by just placing it on the screen. A complex system of algorithms matches customer taste with garment tags.

The Canvas reduces the risk of a poor choice and the customer rests assured that the items he buys match, that they suit his style and all this without trying on many things.

This is a good example of how technologies shouldn’t be used for their own sake, but rather as a means to an efforts-free shopping experience for customers.

Two years, one orchestra

During the two years in which the project was developed, Andreu and Xavier hired outstanding professionals, each one an expert in their own discipline. Martínez + Franch (m+f=!) were entrusted with the retail innovation consultancy, while the conceptualisation of the interior was developed by both designers of the brand and the architecture firm “Madrid in Love”. The technology was built to order by Raona based on the Pixel Sense structure, a combination of Samsung and Microsoft products. Another key asset has been the fashion designer Gala Canut, responsible for the collection and style.

In addition, the company paid special attention when selecting the sales team, according to their human empathy and aesthetic sensitivity. Their training took long and was meticulous.

Andreu and Xavier haven’t only conducted the orchestra, but they have taken special care of every detail and played as many tunes as necessary to accomplish their results.

The shop will be considered a pilot for one year. In other words, it will be a space to learn until it  can be confirmed it works with high profitability and customer satisfaction. In the next stage, the chain shall expand in Spain and internationally.

More than just a shop

Victorio & Lucchino Men is a fascinating store and a fully innovative retail ecosystem, created to yield sustained cash flow. It is a complete business model (front-end plus back-end) that expresses the V&L brand with the five senses. It is based in customer centricity with a single purpose: sustained loyalty. That is why we have added the prefix -eco to the word system.

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Lluis Martinez-Ribes

Source: Código 84

special edition for Aecoc Congress

October 2012

IMPACT, SEDUCTION OR RELATIONSHIP? Some trends for in-store displays

It’s no laughing matter. A vast amount of non-academic literature states categorically that most of the shopping decisions take place in the store.

Barbara Grondin (1) claims that 50% to 70% of shoppers are influenced by at least one of the different in-store media: posters, displays, hangers on the shelves, stoppers, etc.

Millward Brown (2) mentions that around 70% of brand decisions are made in the shop.

Jeff Froud, Strategic Planning Director at OgilvyAction (3) points out that 72,4% of visitors in a shop take at least one of these decisions:

  • What amount to purchase (52%)
  • What brand to choose (39%)
  • Whether they purchase a new category they hadn’t considered before (29%)
  • Whether they leave empty-handed (13%)

The shop impact may vary depending on: the kind of product (going shopping -for leisure- is different from doing the grocery shopping -as a chore-), the customer context (for instance, when they just received their wage), or the personal profiles. Without a doubt, the impact will also differ according to the visitor experience the shop has prepared. This aspect is usually overlooked in many studies.

In any case, regardless of the numbers, what happens in the shop is of foremost importance.  Amancio Ortega (Inditex) already pointed this out: “The store is the best way to build a brand”.

The relevance of in-store displays
Displays are one of the top means to boost sales in the shops. Their relevance is such, that Liderpack grants awards to the very best every year in Spain. They come in all sorts, shapes, assembly systems, finishes…

And their purpose is multiple:

  • To impact visitors by making them aware of something that otherwise would be ignored.
  • To persuade them to buy something unplanned for.
  • To achieve a cross-sell: buy this, along with that, too.
  • To achieve an upsell, that is to say, elevate the product level of what the buyer intended to purchase originally: choose this (and more expensive) option.

On the whole, the aim of displays is to sell more, here and now.

Who could be drawn by such goals?
It’s not a fool’s question. One would answer head-on that both the shop and the supplier have an interest.

However, most of the displays submitted to the yearly Liderpack Awards belong to suppliers, who are very interested in promoting their brand in third-party shops.

The smart retail company (the chain) isn’t very keen on selling supplier-branded products… nor those of its own brand. What it really is eager about is selling the shop, or in other words, that buyers choose their shop over any other.

The best chains aren’t concerned so much about the average sale per receipt as they are about their customers’ frequent return. There’s mathematical evidence to back this statement. In the supermarket advertising of Aqui é, the company advised their shoppers to buy more frequently instead of too much, because their groceries would then be fresher, healthier, more flavoursome and in consequence, they wouldn’t go to waste.

When customers decide to do their shopping in a given chain, they select a product with a very big packaging: the shop. Inside this shop-packaging there are other smaller packs: the sections (with more or less appeal). Within this section-packaging there’s another smaller one, called shelf. Finally, the tiniest of them all is the item’s own packaging, what we colloquially know as product.

When customers reach this point, they have already gone through the three mentioned packagings, all of them chain-branded. It is easy to understand the implicit power of the own brand, when not using the ideological concept of private label. And it is also easy to grasp why more and more suppliers choose to sell directly to consumers, i.e. to be in retailing.

Until such a strategic decision isn’t embraced, companies opt for B plans, such as:

  • Shop in shop, just like those of Roca in some of their dealers’ stores.
  • Areas with atmosphere, like the ice-cream shops that Unilever has set up in collaboration with some chains.
  • The use of posters, or even better, displays, because they can include the products.

In-store display trends
I believe we shall see the following trends in displays:

  • Sustainability should be something considered upfront, right from the briefing stage. Whatever is temporary must contemplate its recyclability, for there is only one planet.
  • They must be attractive in order to break the customer’s lack of attention, which in turn is a consequence of today’s hyper-stimulative way of living. Nonetheless, shouting louder is no longer the right path. The word impact has a suspicious undertone; It would be much better to attract, stimulate and seduce instead. It would also be convenient that shops weren’t visually polluted by displays. When a rowdy store is put in order, and its assortment is arranged in relation to a semantic sequence of customer-oriented criteria, the turnover increases around 7%, according to my experience in several cases.
  • Make customers interact with the display. One way would be through mental interaction via story-telling, in which customers get carried away if their imagination is properly stimulated. Thus, they co-create the message and adapt it to their taste. A second way could be through a multi-sensorial physical interaction like the Sony display, for example, that won the 2010 Award. The visitors could try any of the photo cameras on exhibit and once they did, an interactive screen would come up with product information. Customers could then choose to expand whatever info they required.
  • Because of the human nature, communication is bidirectional, but today only a minority of displays allow visitors to get in touch with the company, for example, by giving their opinion or suggestions or similar. In this respect, many museums are one step ahead of everyone else, for they offer visitors the possibility to write about their experience in guestbooks when leaving. What customers say to other customers is much more convincing than what a company can publicise about itself. If the brand is good, it needs to persuade less and can work more on facilitating customer interaction through different platforms.
  • In my opinion, an in-store connection with someone at a distance is another growing trend. Through the display and via internet, customers can ask for help, information or advice. If half of the Spaniards already use smartphones, why can’t a shop display be connected to the internet?
  • A display with these afore mentioned features could easily be turned into a market research tool, developed in real-time, which could provide insights on what the public likes about a product or doesn’t understand about it -and of course, this would be done without having to ask anything to the person who’s experimenting with an exhibited product.
  • All in all, the display can facilitate the sort of shopping process that people do now: just like with cars or carpets, their experience often starts on the internet and ends in the store. Sometimes, customers are in the store and check something via their phone’s internet, with the possibility of finishing their shopping at home and online. This multi-stage vision of the buying process (by fusing online and offline) will prompt a great degree of innovation in retail.

Where will the purchase decisions be made?
Given that barriers between the digital and the physical have nearly disappeared in customers’ eyes, it would be sound to create displays that could merge:

  • Presence + distance
  • Functional information + boosting imagination
  • Bidirectional communication (from/to shoppers)
  • Understanding of what aspects of the product really attract the customer.

From now on, the decisions shall be made in both types of shops: molecular and digital. Shall the percentage of shopping decisions made in-store become one day an urban legend?

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Lluis Martinez-Ribes

Source: Código 84, (Burbujas de Oxígeno)

nº 165
July-August 2012