[This is the fourth in a series of articles advocating the voice of the Customer in the highly competitive food-retail industry. David Ciancio is Global Customer Strategist for dunnhumby, a pioneer in Customer data science, serving the world's most Customer-centric brands in a number of industries, including retail. David has 48 years experience in retail, 25 of which were in Store Management. He can be reached at David.Ciancio@dunnhumby.com].
Treating Customers differently based on their 'profitability' is counter-productive to building loyalty and toward creating a healthy retail Customer Experience.
All Customers are not created equal…
<p>Any typical Recency/Frequency/Spend analysis tells us that some Customers are more <em>valuable</em> than others in terms of the sales given to a retailer or brand. Further, loyalty industry methodologies like the EMO Index and the Net Promoter Score indicate that those Customers who are more emotionally engaged with, or who more strongly advocate for any retailer or brand tend to be more <em>loyal </em>to that entity.</p><p>Logically, it might follow that some Customers might be more <em>profitable</em> than others, and conversely, some could be downright unprofitable. Knowing which is which is the all-important question in a popular relationship management concept called 'Customer Profitability'.</p><p>A recent Google search returned more than 7 million references to Customer Profitability – how to segment, measure, and manage relationships with Customers based on how much an individual contributes to the firm's bottom line. An accountancy method even has developed around this concept: for example, understanding 'Customer Lifetime Value' and 'Customer Value Management Cycle' are seen as keys to business health by some firms.</p><p>But beware the siren song to consider individual Customer or household profitability.</p>Customers’ gifts of choice – or not
<p>Typically, Customers have choices around at which retailer they spend their money, what brands they select, and how much they engage with a brand's marketing. They decide to what degree they prefer one brand to another, and advocate at-will for their best (or worst) retail and brand experiences.</p>Customers do not, however, have a choice on how much margin they give to a retailer or brand.
<p>So, how is it that Customers can be responsible for their own profitability? Is the Customer accountable to margin by choosing to respond to a particular set of value propositions offered on the retailer's terms? Is the Customer culpable if a value proposition is not itself profitable, or if it allows for choices by Customers that vary in net profitability?</p><p>I don't think so.</p>Doing what’s right for the business…and for Customers
<p>Every business – <em>and most particularly a Customer First organization</em> – must focus its decision-making energy on doing what's right for its Customers and its shareholders at the same time. For Customers, it's about which value propositions increase participation (reach), sales (uplift), or frequency (visits) and thereby incrementally grow the basket 'one more item, one more time'. For shareholders, this means understanding which value propositions grow sales and margin and which don't.</p><p>Customers expect a fair exchange of value for their money. Shoppers cannot be expected to understand the cost to the business of the value offered. <em>It is not the Customers' fault if a loss leader is offered, or if a store coupon reduces the net margin, or if the mix of the products bought according to one level of affluence and lifestyle delivers a higher basket margin than that of another.</em></p>Wrong for Customers, wrong for business
<p>In my experience, (and please feel free to provide a different opinion in the comments) credit card and financial services providers are the strongest advocates of a 'Customer Profitability' approach to relationship management. It's little wonder in these quarters that annual industry churn of accounts is greater than 40%, or that the cost to acquire / switch each new Customer account is in the hundreds of dollars as industry standard, or that business costs have spiraled upward now for decades. Of course, these increased costs are transferred to the Customer via higher interest rates or hidden in higher exchange rates for the retailer (which in turn, drive up retail prices).</p><p>'Good' profitable Customers maximize their credit limits and retain high balances owed, whilst 'bad' Customers 'revolve' by regularly paying off their balances. Poaching to encourage switching is a hallmark industry tactic, using offers like 'freeing balance transfers', often punishing the Customer with hidden charges and costs to serve so that profitability by Customer might be optimized.</p><p>It's my observation that a 'Customer Profitability' mindset sits at the heart of these Customer-disrespectful and anti-loyalty practices. Simply, Customers do not have the gift of choice or the ease to understand which factors drive individual profitability, particularly given the customary qualification requirements and fine print common to this industry.</p>A better language – Proposition Profitability v Customer Profitability
<p>In a Customer First organization, measuring the profitability of its various <em>value</em> <em>propositions</em> should become a business imperative: without it there is no fact basis for managing the value exchange between the company and its Customers.</p><p>In a respectful, Customer First approach to business growth, each value proposition delivers recognizable value to Customers as well as recognizable margin to the retailer or brand. The better mindset and language is, therefore, around Program / Proposition / Offer profitability.</p><p>An emerging best practice in this area is an analysis of the relative cost of each <u>proposition</u> using a common cost metric vs. the Customer impact (uplift).</p><p>Analyzing the relative cost of each <u>Customer</u> or Customer type is a misguided exercise, and is counterproductive to growing true loyalty. If anything, the data reveals more about the retailer's bad habits than it does about 'bad' Customers.</p>Implications for retail leaders
<p>Think about the choices Customers are given in the value propositions you offer; is the profitability of these offers in any way within the Customers' gifts of choice? Who makes the profit margin decision – you or the Customer?</p><p>Mind your language, and coach your loyalty people away from segmentations based on 'Customer Profitability'. Yes, there is a value in understanding 'Customer Lifetime Value' and 'Customer Value Management Cycle' – but only by using spending and preference metrics; profitability considerations do not belong in the equation, however.</p><p>Guide toward the best practice of measuring the relative cost of each <em><u>proposition</u></em> to Customer impact, using a standard cost metric.</p><p>So, I repeat, Customers do not have a choice on how much margin they give to a retailer or brand. Treating Customers differently based on their 'profitability' is counter-productive to building loyalty and toward creating a healthy retail Customer Experience.</p>Memories of panic buying may be fading here in the UK but have resurfaced elsewhere1. The near constant threat of another wave of Covid-19 may yet prompt another round of hyper demand. Whilst there is little hard evidence to determine the underlying drivers of panic buying2, there are numerous theories that the retail industry may benefit from exploring.
Feroud Seeparsand, dunnhumby's Senior Consumer Psychologist, outlines some likely theories to explain the 'why' behind the 'panic buy' and some implications for retailers to prevent it reoccurring in future.
1. Loss Aversion
<p>Nobel Prize-winning economist Daniel Kahneman stated that 'loss aversion' was his and Amos Tversky's single greatest contribution to decision-making theory3.</p><p>We feel the pain of loss more than an equivalent gain. In other words, losing £100 hurts more than the joy of winning £100. When applied to panic buying, we fear for the loss of a product we could otherwise have had. Perhaps more to the point, we would normally have had access to a variety of products. Relative to this normal point of reference, the relative loss of not possessing a product helped lead to panic. As customers would normally possess a certain product, the relative loss of it created pain.</p><p>A curious detail is that small numbers can make big differences, a concept called 'diminishing sensitivity'; winning £200 does not double the joy relative to winning £100. In other words, even small numbers of a valued product can have a significant effect on one's decision making. It is because of this diminishing sensitivity customers may lean towards zero risk aversion, in other words not to risk missing out on a product; if you see it, buy it!</p><p><em>Implication for retailers: Use the new reference point that past panic buying did not stop most customers obtaining products.</em></p>2. Social Norms
<p>Another Nobel Prize-winning economist, Richard Thaler, and his colleague Cass Sunstein highlighted numerous heuristics to nudge behaviour4; one of these is social norms or copycat behaviour. We are perhaps all guilty of assuming restaurants with longer queues have superior dishes or assuming that the more popular films, plays or books are worth consuming. When applied to retail, if a customer sees another purchasing a particular item, the odds are that they will follow. This can easily be exaggerated through social media and news reports.</p><p>It does not matter if this perception is factually inaccurate; perception will still hold sway. If customers do cause products to sell out as a result, this is likely to lead to a scarcity effect, where those products are valued even more than before. This can be further exacerbated if such products are perceived to be potential life savers, like hand sanitisers or medicine.</p><p><em>Implication for retailers: Highlight how most people are not panic buying. Foodstuffs North Island and South Island, in New Zealand, got out ahead by introducing their 'Shop Normal' campaign, which encouraged customers to 'shop normally and be kind in supermarkets'. Tesco in the UK also ran a 'Together we can do this' campaign in national media to encourage people to 'shop normally together'.</em></p>3. Uncertainty Breeds a Desire for Control
<p>Sometimes the actions that can save lives, such as hand washing and social distancing, are simply not enough to regain a sense of control5, as they are too dependent upon the goodwill of others. Therefore, there remains a need to reduce anxiety. Stockpiling or buying more, as a form of retail therapy, is a manner for regaining control.</p><p>Scientists have found uncertainty leads to the consumption of utilitarian products (such as cleaning agents and cooking ingredients), i.e. products that give you something to do6. Shoppers are less likely to be interested in the latest fashion trends. When one adds to the mix a virus that demands hygiene, the hyper-demand for particular products can be better understood. The same scientists explore the concept of 'displaced coping', where shoppers purchased items that are of no direct relevance to their uncertainty. This may go one step to explain the recent insatiable worldwide desire for toilet paper.</p><p><em>Implication for retailers: Provide customers with products that may provide a sense of control, such as gardening, DIY, crafts, puzzles.</em></p>4. Game Theory
<p>Whilst behavioural economics and nudge theory assume irrationality, game theory (which also can claim a Nobel Prize by John Nash, as featured in the film A Beautiful Mind), assumes rationality.</p><p>In the same way panic buying exists, customers may panic and create a bank run, where customers take money out en masse which then collapses a bank. In one study, it was found that asking participants to recount a time when they felt fear was found to increase the likelihood of a bank run in the form of a game format7. There was some evidence that inducing sadness was less likely to create a bank run. Given the emotion of fear led to bank runs, it is of little wonder that the fear of a pandemic may have led to panic buying.</p><p><em>Implication for retailers: Influence emotion to avoid fear (e.g. through in-store media and music).</em></p>5. Personality Theory
<p>A recent global survey addressed toilet paper hoarding through personality traits8. It was found that customers who felt more threatened by the pandemic, possessed greater emotionality and greater conscientiousness (i.e. planned more) led to more toilet paper hoarding. This study may suggest that appealing to higher values2,9 (ie encouraging responsible behaviour) may not help to avoid panic buying.</p><p><em>Implication: Encourage long term planning and purchase of long shelf life products, to ease supplies if a second or third wave returns.</em></p>6. Concluding remarks
<p>This is not an exhaustive causal list, but instead focuses on theories that could have at least some practical application to limit panic buying. The theories covered include areas that assume irrationality, such as behavioural economics and nudge theory, or rationality such as game theory. Other theories may sit more on the fence.</p><p>Whatever the drivers for panic buying this is a topic that retailers need to address. Even if panic buying does not reoccur within the Covid-19 pandemic, it is likely to return in some future event whether it be a natural disaster, climate change, strikes or supply shortages.</p>The dunnhumby Consumer Pulse Survey is a multi-phased, worldwide study of the impact of COVID-19 on customer attitudes and behavior. We surveyed more than 27,000 respondents online in 22 countries, with interviews conducted for Wave one from March 29 – April 1, for Wave two from April 11 – 14, and for Wave three from May 27 – 31. Due to the rapidly unfolding crisis in North America, dunnhumby conducted Wave four from July 9 – 12 in the U.S., Canada and Mexico only. Here are highlights from the study:
In a series of posts published earlier this year, we covered the results of the dunnhumby Customer Pulse – a global study designed to explore changing consumer mindsets during the COVID-19 pandemic. Over three waves, conducted between March and the end of May, we polled thousands of people from more than 20 countries on subjects including supermarkets' responses to the outbreak, the economic outlook, and how their shopping behaviour had changed due to COVID.
At the beginning of September – three months on from the previous wave and with supply chains stable and the changing nature of lockdowns – we wanted to revisit the Customer Pulse to see what, if anything, had changed. Below are some of the standout findings from this fourth tranche of research.
assorted fruits at the market
In the decade since Richard Thaler and Cass Sunstein's Nudge: Improving Decisions About Health, Wealth and Happiness was published, nudge theory has enjoyed unprecedented success.
Predicated on the idea that individuals respond better to indirect suggestion than outright commands, nudge theory is commonly used as a way of subtly influencing our behaviour towards positive choices. The idea has gained such traction, in fact, that many governments around the world have created "nudge units" in a bid to tackle thorny issues like obesity and the climate emergency.
Tackle the temptation of treats
<p>In 2018[1], scientists published their findings from a seminal experiment in which some of the UK's leading retailers removed snacks and confectionery from the checkout. Purchases of sweets, chocolate, and crisps subsequently fell by 76% when compared to supermarkets that kept those items in place. In other words, just changing the location of products can nudge shoppers into healthier decision making.</p>Give healthier goods more space in-store
<p>In 2012[2], scientists investigated whether the sale of healthy snacks next to the checkout in a hospital canteen could be influenced by the amount of shelf space they were allocated. Healthy products were given a quarter of the shelf space in the first test, and three-quarters in the second, with sales rising from just 14% to 44% as a result. Visible availability of healthier options clearly plays a big role in pushing us towards them.</p>Create dedicated “fruit and vegetable” partitions in trolleys
<p>One particularly innovative nudge was discovered by a group of US scientists in 2017[3], who found that introducing an area in a trolley specifically for fruit and vegetables led to higher sales of those items. As with the previous example, the amount of space dedicated also had a role to play. In one study, increasing the size of the partition from 35% to 50% of the trolley increased customer spend on fruit and veg from $14.97 to $17.54.</p>Normalising fruit and veg purchases
<p>Change4Life is a campaign run by the UK's Department of Health, aimed at nurturing healthier lifestyles. A 2015 study[4] commissioned as part of the campaign suggests that "normalising" the purchase of fruit and veg goes a long way towards influencing shoppers. When trolleys used statistics showing how many other shoppers purchased fruit and veg, spend in those categories rose by 12.4%. Social norm communications like this are a classic form of nudge that exploits our deep-seated concept of conformity (in this case in a very positive way!).</p>Use cartoon characters to encourage healthy eating amongst children
<p>Obesity isn't just a problem for adults. To help tackle childhood obesity, the Food Dudes[5] programme put cartoon role models at the centre of its in-school campaigns. One London-based study found that fruit consumption amongst the poorest eaters increased from 4% to 68%, while an unexposed control group showed no change. Whilst this may not show increased consumption in a retail context, the concept of using accessible and entertaining imagery and characters to promote healthy eating out of store should be equally applicable in-store.</p>The new nudge on the block
<p>Some of these techniques came together last year when the Royal Society for Public Health showcased Nudge, a pop-up at The People's Supermarket in London[6]. While the store was only open for two days, the purchase of sugary drinks was halved according to customer feedback. There are plans to make Nudge a permanent feature of the store, and to use data from every purchase to help identify further opportunities to influence customers towards healthier choices.</p><p>And new nudges are always popping up. In November 2019 a new DnaNudge shop opened in London. Combining a wristband and app, DnaNudge aims to help users make better food shopping choices based on their DNA and lifestyle. Food is scanned using the wristband, which will then flash red or green based on its suitability for the owner's biological profile. A product with high salt content will flash red for a user with high blood pressure, for instance. DnaNudge, which recently showcased at CES 2020, is collaborating with Waitrose to study the effects of this approach on pre-diabetic customers.</p>Keeping up with the PACE
<p>Food labels themselves can be also used to encourage healthy eating, by translating calories into walking time to nudge people into healthier choices. This approach is often called Physical Activity Calorie Equivalent, or 'PACE' labelling, and has shown promise in reducing the number of calories and the amount of food consumed by the public[7]. Some results in the UK have been so promising that the Royal Society for Public Health has called for PACE labelling to be introduced. Despite further research needed to assess its real-world impact, this nudge is likely to receive more attention in the near future.</p>Nudging us towards a healthier future
<p>It's a sad fact that non-communicable diseases (such as heart disease, cancer and diabetes) still account for around 70%[8] of global deaths. Furthermore, many of these deaths are due to factors that the victim may be able to influence, with tobacco use, alcohol abuse, diet, and inactivity all contributing to that number.</p><p>While grocery retailers might not have a direct responsibility for commanding their customers to eat better, they do have the opportunity to play a huge role. As behavioural science becomes better-known around the world and savvy customers expect retailers to make it easier for them to make healthier choices, expect a tipping point soon at which the nascent nudge becomes the new normal.</p>Are you looking to increase your contactable Customer base? How much money are you losing on incorrectly identified Customer communications? Throughout our 30 years of big data experience working with clients across industries around the globe, we have found that maintaining contact through relevant Customer engagement is a crucial component of putting the Customer First.
Essential to preserving contact data is ensuring that you have the most up-to-date information from your Customers; not an easy task. On average, people in the United States will move an average of 12 times in their lifetime. United States Postal Service data indicates 14% of the population change addresses annually. As email contact has grown, it's important to note that, on average, 30% of people change their email addresses each year. This is driven by ISP or job changes, or just to stop being spammed. As people move away from home phones to primarily mobile devices, phone numbers are stabilizing as consumers maintain the same numbers through physical moves.
1. Internal:
<p>Maintaining Customer information manually through an internal data team can be time-consuming and costly. It may require Customers to update their information online or through a call center, with an internal data team to validate the changes, and your Customer engagement team to be made aware of the changes so they can update their downstream systems. If you are in contact with your Customers on a weekly basis, this process will need to be on-going and thorough to accurately capture the data changes.</p>2. Third party:
<p>Many third-party CRM systems and databases exist, often removing the manual steps from this process and may even automatically update Customer address information via online sources. In many cases this information is based on publicly available data or the USPS' address tools. However, these updates can verge on being "creepy" to many Customers. Automated systems do remove many of the manual touch points for your teams, but the information is then strictly provided by the third-party databases and processes. Additionally, downstream systems often still require updates from these tools to maintain the most correct Customer information across your data landscape.</p><p>While there are some hybrid models of options, here are the main pros and cons we have identified for the primary methods:</p>labeled box lot
Article originally appeared on Forbes.
My company recently produced a report on the state of the food retail industry, and in studying that sector, we discovered something that we hope will make food retailers stand up and listen. We learned that the nation's top grocery chains have found a way to focus on both short-term financial performance and investment in long-term consumer engagement. The latter is considered an insurance policy for the future — a sobering thought in the new year.
Data
<p>Recent years have brought with them the dawning realization that retailers possess abundant consumer data. Gathered and culled from direct interactions between stores and their customers, data of this quality helps retailers price and promote their products more intelligently. It helps them with product assortment, store design and managing the new kinds of services they offer. This can include things like in-store pickup and options for self-service, depending on what makes sense for their customers. More profoundly, data can help retailers think about how they can monetize that data to help their vendors connect more meaningfully with customers. The reality is that all grocery retailers potentially are media companies, with access to online and offline media properties. It's a lesson learned from Amazon, but a small number of retailers around the world are helping to raise their profit margins by taking a page from the playbook. The place to start is with first-party customer data, which is what retailers uniquely possess.</p>Relationships
<p>For food retailers especially, we learned that there is an enormous number of inefficiencies with how food retailers engage with vendors, beginning with how they collaborate on pricing and promotions. Some retailers are struggling to <a href="https://mi9retail.com/are-spreadsheets-to-blame-for-the-retail-apocalypse/" target="_blank" rel="noopener noreferrer">move beyond spreadsheets</a> to other systems that help automate exceedingly detailed work. We are living in a time where inefficiencies can make or break a business. But still, many food retailers are ready to concede that times have changed. Beyond providing technology that moves beyond spreadsheets, retailers would benefit from interviewing their vendors to discover what would make life easier for them in this highly competitive industry.</p>Strategy
<p>Change may be painful, but inertia will be lethal.</p><p>As the celebrated business scholar <a href="https://www.amazon.com/Innovators-Dilemma-Revolutionary-Change-Business/dp/0062060244" target="_blank">Clay Christensen</a> has written, it is very difficult for any business to change course on a strategy that had made it successful in the past. He calls this the innovator's dilemma because, at almost any time in the evolution of any industry, leaders must understand that a decision regarding the future must be made.</p><p>To that end, the future is not served by signing a partnership with a third-party fulfillment provider to launch an e-commerce service. It's about making better decisions that impact the core of your business and operating more efficiently to better serve your customers across all of your channels.</p><p>But here's where food retailers have a unique opportunity, at the beginning of 2019, to ignore fear and take a small leap into becoming more viable by making decisions based on what they know about their customers. There is no business that knows more about people than retail, because they actually meet and greet them every day.</p><p>Take heart, and fear not. This is only the beginning of a story that's mostly yet untold.</p>FOR RETAILERS
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In the first episode of Customer First Radio, Dave Clements, Global Head of Retail for dunnhumby and David Ciancio, Global Head of Grocery for dunnhumby kick off the series by discussing what it means to be a truly Customer First business, share which retailers and brands today embody a Customer First mindset, and examine how Customer First materialized during the pandemic with retailers.
Customer First Radio Episode 2 | Erich Kahner, Associate Director of Customer Strategy at dunnhumby
The 2021 Retailer Preference Index: Who's winning and why. David Ciancio, Global Head of Grocery discusses the 2021 U.S Retailer Preference Index (RPI): Grocery Edition with the lead author of the RPI, Erich Kahner. They unveil key insights and discuss who is winning and who is best positioned for the future.
Prophets of Aisle Six, Episode 2: Heinen’s Fine Foods
The Prophets of Aisle Six is the first online reality series focusing on innovation in the food retail industry. In this episode, Jose Gomes, dunnhumby's North America Managing Director, travels to the downtown Cleveland store of Heinen's Fine Foods. Jose meets with Tom and Jeff Heinen, co-owners and brothers, and learns how they are evolving their grandfather's mission of delivering excellent customer service. With 23 stores in Northeast Ohio and the greater Chicago area, and a 90-year legacy, Heinen's is proving that being a small retailer can be an advantage when it comes to data.
In this series, dunnhumby tours the globe and speaks with some of the world's greatest brands, exploring their biggest challenges and how they are using customer data science to meet those challenges.
In my last post, I posed five questions to retailers to help them determine whether they're ready for a customer-first mindset. Now, I'd like to challenge the retail basics that seasoned retailers were trained on, and suggest instead a new customer data science approach.
"Retail is detail" is common industry wisdom, and it means that achieving success is subtle and difficult. Success in any field demands practice and experience, and so it is little wonder that many senior retail and brand leaders and managers have vast years of involvement, and that most have grown up through the business in progressive steps.