Increasingly, retailers are focusing on service-based revenue streams. In the past, this has been restricted largely to extended warranties and insurance policies tied directly to single purchases and with a one-off payment.
Now, the goal is shifting to getting customers to give retailers money on an ongoing basis.
Take the news that Tesco is going to turn Tesco Personal Finance into a full-service retail bank. It has already branched out into services with its mobile phone and broadband offerings, but judging by its present form they could be just the tip of the iceberg.
Meanwhile, at Google’s UK Retail Summit yesterday, Best Buy International chief executive Bob Willett spoke about how he hopes to turn Best Buy’s Geek Squad into an engine for revenue growth. The 18,000 geeks, as Willett calls them, working for the company did 12,000 PC repairs in five days last week and he says that the company has the capacity to more than double this number and add TV and mobile phone repairs into the mix.
But again, the PC repair offering is just a starting point for a bigger vision. Willett plans to take the idea of service much further with the idea of “co-creation”, where the retailer works with customers on an individual basis to put together a package that suits their needs. He said: “Consumers are savvy and know what they want, but not entirely. So they want to work with someone they trust to create a solution.”
And, as retail IT departments will know, when someone sells you a solution, it normally costs more overall and means you are paying out over a period of time for advice, products and ongoing support, compared with being sold just a product.
This mirrors a phenomenon that’s taken place already in the business-to-business technology market. Many suppliers to businesses – and this is not just happening in the IT sector – no longer provide products, but solutions and services.
Commoditisation has led to wafer-thin margins on many of the IT products that businesses buy for their own use and so business models have changed.
IT companies are judged – and valued in the City – on their ability to earn money from customers on an ongoing basis, rather than from simple one-off transactions however large they may be. To get to this point, they had to experience a period of pain while investing in the infrastructure and staff needed to provide services at the same time as remodelling their revenue streams.
Two of the world’s most successful retailers – Tesco and Best Buy – are daring to tread this same path. If the IT industry has any lesson to teach retailers, it is that they will find they have to follow on.