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By Niall McKay  |  Posted 12-01-2004

Two-Faced & Tight-Fisted

 

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: Introduction"> Richard Ehara Is a Demon Customer.

When the 37-year-old consultant from El Cerrito, Calif., decided to buy a video camera last spring, he researched the product online, did the rounds of the retail electronics stores, asked countless questions of in-store sales reps, and rigorously tested several models. Then he went home and bought a Sony PD170 online, at a substantial discount, from B&H Photo. "It made no sense to buy a $3,500 video camera in the store, when I could save about $350 in sales tax by buying online," he says. "I used the extra $350 to buy accessories such as a bag, lens filters and batteries."

Mr. Ehara is a retailer's worst nightmare. He is not burdened by traditional marketing traps such as brand loyalty or customer service. Demon customers will carry out research at brick-and-mortar stores, tying up sales reps for hours at a time. They'll even purchase a product, test it at home for a week, and return it to the store for a full refund. Then they'll find the cheapest possible source from which to buy it, be it online or off.

Mr. Ehara is not alone. Nearly 70 percent of Internet shoppers admit to browsing in traditional retail locations before buying online, according to a recent survey by the Annenberg School Center for the Digital Future, at the University of Southern California. And the opposite is also true. About two-thirds of today's shoppers do extensive research online, and then pop out to their local mall and buy the goods in person, according to Forrester Research Inc. These multichannel shoppers accounted for in-store sales of more than $100 billion in 2004.

The numbers show that over the course of a single purchase, customers frequently cross over between the online and offline worlds. In fact, between the time they start their research and when they make their purchase, half of all multichannel shoppers switch brands, according to Forrester. That's because most retailers have made little or no attempt to coordinate their online and in-store operations. In many cases, the two are treated as completely separate business units. Some retailers, such as Victoria's Secret Direct, won't even allow online purchases to be returned at stores. Toys "R" Us goes a step further and farms out its entire online operation to Amazon.com.

Without better alignment between their online and offline efforts, retailers are missing a huge opportunity. According to the U.S. Department of Commerce, electronic commerce accounted for $15.7 billion of the $919 billion in retail sales during the second quarter of 2004, and that figure is rapidly increasing. Online sales are expected to jump 27 percent this year over last year, according to Forrester Research. In response, retailers are investing about 2 percent of their revenues in information technology, reports an IBM Business Consulting Services 2003 retail survey of CIOs. Yet the endemic lack of loyalty the Web has spawned is costing retailers nearly $50 billion a year in lost business, says Carrie Johnson, a senior analyst at Forrester. "It's more than just losing a sale here or there," says Johnson. "Most companies will tell you that multichannel customers spend more than others." And with the holiday season upon us, when retailers rake in as much as 40 percent of their annual revenue, the issue of how to market to multichannel customers is on everyone's mind.

"The problem is that retailers have focused on what they want to sell, not on what their customers need," says Joe Gagnon, retail leader of IBM Business Consulting Services, based in Armonk, N.Y. "That's because most don't have the information they need to make you an offer you won't want to refuse." Gagnon believes that many retailers will live and die on their ability to personalize their offerings and integrate their channels. That's because he sees the retail markets rapidly fragmenting, with customers migrating to low-cost and discounted retail operations, such as Wal-Mart Stores Inc. and Costco Wholesale Corp., at one end, and high-end specialty providers, such as San Francisco-based Williams-Sonoma Inc., at the other. For the retailers in-between, a tightly integrated, multichannel customer experience could be the difference between competing and closing up shop.

Meanwhile, as a new breed of independent Web site arrives, the temptations of disloyalty just keep growing. Shoppers have long been able to research such items as consumer electronics products on a variety of sites, such as CNET.com, ShopLocal.com, Froogle.com, SlickDeals.net and NexTag.com, which provide price comparisons, detailed product information, insider tips and consumer feedback—all the information shoppers need to make ultra-informed buying decisions, whether they buy online or from a brick-and-mortar store. But now these sites can provide even more confidential information, such as which items a retailer is currently selling at a loss, which retailers have the most favorable return policies, and which have planned upcoming sales. The independent sites, though they don't sell the merchandise themselves, are happy to help. "If they spend time on our site we're winning," says Rafe Needleman, CNET's editor of business buying advice, "because they use our content and they view our advertisements." The irony is retailers have helped spawn the very sites that are now undermining their margins: Desperate to cater to the increasing numbers of sophisticated online shoppers—whom Forrester says are wealthier and buy more—retailers will pay somewhere between 5 cents and 40 cents if the consumer clicks through to their site from an independent site.

Are retailers finally catching on? Suddenly, the industry is abuzz with the phrase "multichannel marketing." As the threat of the demon customer grows, businesses are learning that, in order to create some semblance of brand loyalty, they need to exert greater control over the process by which their customers research, buy, pick up and return their goods across multiple channels. At the very least, tighter integration of the on- and offline shopping experience can lead to improvement in customer satisfaction. Otherwise, says Forrester's Johnson, "disloyalty will continue to reign."

Still, it remains to be seen if even the most sophisticated multichannel strategy could reel in the likes of Richard Ehara, or whether it's even worth trying.

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: Dancing with the Devil"> Dancing with the Devil

As part of the assault on demon customers, retailers are getting better at tracking them throughout the research process, with the goal of getting them to stick around and make their purchases. There are simple ways to achieve this, such as providing online shoppers with a Web coupon that they can print out and redeem in stores, or allowing online customers to pick up or return items in the store. Despite the relative simplicity of these solutions however, just over half of the top 100 retailers offer in-store returns for online purchases, and just 13 percent offer in-store pickup, according to a recent survey by Stores magazine.

But many Web sites today go further. Apple.com automatically logs in customers when they open the Web page, and the log-in information can then be tied to credit card purchases made in the offline stores, which helps to give Apple a better understanding of the multichannel shopper. When customers save something in their shopping carts, they're likely to get a phone call from an Apple sales assistant asking whether they have any questions about the product. The idea is to ensure that the site doesn't lose customers while they're crossing over from the online to the offline world—assuming, of course, that they don't react badly to the unsolicited sales call.

At Gap Inc., based in San Francisco, if a regular-priced item is not available in the right size or color at a store, the company will ship it to the customer's home from another store, at no extra cost. Customers can also place online orders from within the stores themselves. And at Plano, Texas-based J.C. Penney Co. stores, sales clerks are also using Web-enabled point-of-sale systems to give retail customers access to items the store doesn't have in stock, according to Tim Lyons, spokesperson for J.C. Penney.

Profile of a Multichannel Shopper
  ACTIVE MULTICHANNEL SHOPPERS WHO HAVE BEEN ONLINE . . .
 Has never multichannel shoppedLess than 5 years5 or more years
AGE (Mean)484442
Household income (U.S.$)56,47658,81873,699
Has college degree 26%28%48%
Has broadband at home 21%30%43%
Made online purchase in the past 3 months40%61%76%
Source: Forrester Research Inc.

But the poster child for the personalized multichannel shopping experience may be Recreational Equipment Inc., largely because the membership-based sports-equipment cooperative, based in Kent, Wash., made the investment necessary to integrate its on- and offline customer databases and inventory systems. Compared with most retailers, it was cost efficient for REI to merge its bricks and clicks operations because it already had extensive customer information, such as a history of past purchases, in its membership databases. So when its online customers asked if they could forgo the shipping charges—often significant for large items, such as canoes—and pick up the items at their local store, the company made it happen. The tactic was cheap to deploy because such orders are loaded along with the rest of the stock, which leaves Washington state each week to replenish REI's 76 stores around the country.

REI's efforts met with tremendous success: In the first 12 months, in-store pick-ups from online sales accounted for $40 million in revenue, and they now account for a third of annual online sales. The strategy has other advantages as well: Like most retailers, REI believes that once a customer is in the store, he or she is likely to buy something. "We found that one out of three people who came to the store to pick up an item they bought online also spent, on average, an extra $90 [on accessories and other merchandise]," says Joan Broughton, REI's vice president of the multichannel program.

And, like flared trousers, some technologies that had fallen out of favor are making a comeback: In-store kiosks are now reappearing. REI offers retail-store customers access to product information via kiosks. Sales clerks can also look up a customer's previous purchases and get easy access to information about products in the store, or products that are offered online, but which are not currently in stock. REI is considering equipping their sales staff with smart handheld devices that will let them see both on- and offline inventory, and assist customers with information about products in the store.

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: Exorcising the Demons"> Exorcising the Demons

Even companies that don't have the luxury of a membership base like REI's (willing to pay $15 to join) are getting into the game. Consumer electronics retailers Best Buy Co., of Minneapolis, and Circuit City Stores Inc., based in Richmond, Va., both enable gadget addicts to purchase online and then race to the local store for immediate gratification. This is possible because both stores allow shoppers to check online to see which local store is carrying the item they want. Best Buy will even reply with an e-mail, then send a sales assistant out to physically pick up the item from the shelf and hold it until a customer arrives to buy it. That way, the customers are assured that their trip to the local store will not be fruitless. Best Buy estimates that at any given time, about 50 percent of its customers have first researched products on its Web site.

Interestingly, Best Buy CEO Brad Anderson recently caused a ruckus by going public with the company's plan to discourage its more costly demon customers. Best Buy's goal, says Anderson, is to separate the 20 percent of transactions that are costing the company money from the 80 percent that are making the company money. "We do not use the phrase [demon customer] internally at Best Buy," says Sam Taylor, senior vice president of online stores and marketing at Best Buy. "What we are trying to do is focus on our most loyal customers and provide them with the best service that we can offer."

Among the company's get-tough tactics: a 15 percent restocking fee on returns. The company is also doing surveys and mining customer databases in an attempt to identify what types of customers shop at each store. Best Buy realizes that it needs to respond to a market that is rapidly segmenting, so it is using this information to convert 68 California stores to address five specific customer segments—small business owners, affluent professionals, family men, suburban moms and young early adopters. Each store will be geared toward one of the five different buying behaviors. For example, the family-man stores will offer same-day home theater installation. "We are now focusing on this market segmentation so that we can offer a more targeted service to these customers," says Taylor. The company's "Geek Squad," for instance, will not only help customers find the product that best suits their needs but will also, for a fee, provide after-sales support, such as coming to their homes to install a wireless system. "These are services that other retailers cannot offer," Taylor adds.

Resources
Books

Angel Customers and Demon Customers

By Larry Selden and Geoffrey Colvin Portfolio, 2003

Big Change at Best Buy
By Elizabeth Gibson and Andy Billings Davies-Black Publishing, 2003

Furthermore, Best Buy is culling the names of its less profitable customers from its marketing lists, according to recent reports. Perhaps that's good news for Best Buy's shareholders, but bad news for the likes of Mr. Ehara, who may find it harder to do his offline research. He and other good shoppers may get marked as bad customers. "It seems like a rather negative approach to me," says Forrester's Carrie Johnson. "I think it's probably easier to encourage good customers than try and discourage bad ones."

The question is whether the good customers will get significantly better service, and spend enough, to make up for the loss of less profitable ones. In the meantime, most stores will continue to try to change the behavior of their demon customers by gaining their loyalty. Richard Ehara says bring it on.

Niall McKay is a San Francisco-based freelance writer who has written for The New York Times, Wired and Red Herring.