There’s no doubt that retailers across the UK are navigating very stormy waters. The ability to shop anytime, anywhere, anyhow has changed consumer behaviour more profoundly and rapidly than ever before.
Increasingly savvy and addicted to promotions, consumers have never had it so good. For retailers trying to adapt and keep up, some long-established principles that have served them well for years have fallen away with remarkable speed.
Even just a few years ago, retail growth was driven by expanding the customer base by opening a new shop in a new location. Retail was about a land grab.
Today, as digital capabilities unlock a customer base all over the world, the future is all about a land grab for high-value customers.
“If retailers continue to make decisions based on a store or channel-only basis they will miss opportunities”
The new organising principle for retailers in an omnichannel world is the customer. If retailers continue to make decisions based on a store or channel-only basis they will miss opportunities.
A couple of examples illustrate why. One menswear retailer had concessions in a number of hotels. Sales per outlet were low and the concessions seemed obvious candidates for shutting down.
However, analysis showed while the revenue per outlet was low, the business was achieving remarkably high repeat sales from international customers who had stayed in the hotels but subsequently ordered via its digital channels. These stores were critical in acquiring high-value customers.
Another example. A women’s beauty retailer was looking at discontinuing a small, niche skincare brand. But analysis of this brand’s performance through the customer lens showed that it was disproportionately important for its highest-value, most loyal customers. So instead of discontinuing, the brand expanded.
What’s the common denominator in both these examples? It’s the customer. Or rather, it’s the analysis of business performance through the lens of customer profitability instead of through the traditional vector of store or product performance.
That new perspective creates a seismic shift in how retailers can manage their businesses.
What are most retailers likely to find when they analyse their business from this new perspective? Chances are that most profit will come from a relatively small number of individuals.
Our analysis of 28 retailers—across geographies, sectors and sizes — highlights that typically 5% of customers generate a third of the profit, and 35% of the customer base accounts for 80% of profit.
Even more extreme profit concentrations are frequently found. More worryingly, as much as 2% of the customer base typically is loss-making because these customers are so adept at using discounts, promotions and returning items.
“This focus on individual customer profitability enables a far more sophisticated set of customer strategies”
In fact, this focus on individual customer profitability enables a far more sophisticated set of customer strategies to retain and acquire the highest-value (and potential) customers.
For loyal customers, it’s all about keeping them and potentially nudging them into the next sale or a new category.
For new customers, it’s about managing them through the ’getting to know you phase’ and converting to loyalty as quickly as you can. And, of course, retailers always need new customers.
But it is about hunting for those with the high potential. Armed with the insights from their existing high-value customers, retailers can target individuals with forensic precision, using innovative, personal and creative marketing to get them on board with the brand.
Being a ‘customerkeeper’ is not a CRM strategy. It affects the entire organisation. The retailer needs to take all of its data and all of its insights into customers and profitability and rethink key areas of the operating model.
For instance, product design teams should now be leveraging customer data as a matter of course, understanding how a high-value customer differs from an average- or low-value customer.
Marketing needs to be assessing every action and investment through the lens of incremental customer lifetime profit.
How this new mindset influences different areas of a retailer’s business is one of the most important factors for them to explore.