Evolutionary Strategy

Evolutionary Strategy

Tsutaya's strategy reflects five key innovations. First, the team introduced mail-maga —Japanese-English for "mail magazine"—that can be sent to an e-mail account on a mobile phone or PC detailing upcoming releases of books, music and video games. They are popular: TOL sends out 26 million mail-magas every month. To subscribe, an i-Mode user goes to TOL's site and chooses from a selection of magazines. One magazine, MOVIC, details new releases of both movies and music. Others, like those on individual artists from Madonna to Morning Musume, a popular Japanese all-girl band, are more narrowly focused.

The e-mail magazines have reduced customer churn: According to DoCoMo wireless strategy director Takeshi Natsuno, they've helped to double the number of visits by Tsutaya customers to the company's brick-and-mortar stores. A subscriber's choice of one magazine gives TOL more information about subscriber preferences. At the same time, subscribers—by reserving and ordering favorite CDs and movies online—give Tsutaya a bird's-eye view into future sales and marketing trends.

TOL's second innovation was its online reservations service. Members can reserve copies of books, movies and video games ahead of their release, and have them delivered to their home or office, or even to the nearest Tsutaya store. Eighty percent of Tsutaya members use the Internet (Web and mobile), compared with more than 40 percent of the general Japanese population as of January, according to Nielsen//Net Ratings. Between 10 percent to 20 percent of Tsutaya's brick-and-mortar customers are also TOL members. Besides increasing store traffic and boosting customer loyalty, the reservation system also cuts Tsutaya's overhead costs. "It frees up the guy behind the counter," says Mercer's Kramer. "It's exactly what the automated teller machine did for banking, and any little improvement in efficiency drops to the bottom line."

The third leg of Tsutaya's technology strategy is its online coupon program. TOL's first president, Shinsuke Fujimoto, dreamed up the idea one day when sharing a midnight snack with friends at Yoshinoya, a 24-hour beef-and-rice fast-food chain. Yoshinoya gave him a coupon for a discount meal, and Fujimoto wondered why TOL couldn't offer the same kind of coupon. The result: TOL sends personalized discount offers to customers via their mobile phones and PCs. Been a while since you visited a Tsutaya store? The company will send you a special offer on your mobile phone that's only good at your neighborhood store. To redeem it, you bring in your mobile phone, show the clerk the special offer on the screen, and you can get a 10 percent discount on the latest Tori Amos recording.

The company has since extended its coupon strategy to include marketing partners such as Ryohin Keikaku, a retailer that operates a discount goods chain selling everything from soap to clothing to televisions. Its first joint coupon with the chain, issued in December 2000, attracted nearly 60,000 hits for a 10 percent, 10-day discount on any of the retailer's products.

Tsutaya says that about 100,000 people use the coupon service every month. The payoff? Coupon users, on average, visit Tsutaya shops 22 percent more frequently, and spend 7 percent more overall than coupon-less customers, Miya says.

Now, Tsutaya is starting to experiment with a fourth innovation, variable pricing—gathering and then isolating a specific population, tracking its habits via mobile Internet, then sending it highly customized offerings for free product trials, a type of real-time focus group community on which to test new products. When Kirin, the Japanese beer company, wanted to introduce a new brew two years ago, it asked TOL to conduct a survey of customers who frequent Tsutaya's store in Shibuya. TOL sent customers a link to a coupon for a free beer tasting at the Shibuya store. Visitors were then encouraged to fill out a survey on their mobile phones detailing whether they liked the new beer, Kirin Lager Special Light, and why they might buy it. Says Shinozaki: "Our ability to target certain segments of the population allowed us to charge [Kirin] a higher price, and the response rate to our survey was very high." The company has done similar promotions for companies in other industries, like shampoo manufacturers, but now it sees the market research option as a potentially lucrative source of new revenues.

In the future, Tsutaya might also use its coupon strategy to selectively reduce inventory. "Say Tsutaya knows that certain people buy American action films, and then discovers that they have excess inventory of exactly that type of film piling up somewhere," says retail analyst Hideki Goto of Deutsche Bank Tokyo. "All Tsutaya would have to do is send those American action flick fans a discount coupon, and they can eliminate their inventory very quickly."

The fifth and newest part of Tsutaya's digital strategy is a new search engine called TOMAS (Tsutaya Online My Agent System). It's aimed at guessing customer needs and tastes in videos and books based on past purchases. But unlike Amazon.com, Tsutaya's service combines customer data collected by the company online with data collected offline. And TOMAS is mobile—letting customers tap into their mobile phones or PCs to rate and choose movies, books, videos and CDs. How up close and personal does TOMAS get? Pretty close. Miya says the company's database is now so sophisticated, it can differentiate between customers most likely to want very grisly war movies, for example, from those who prefer war movies with less violence—and use that data to more finely personalize what users find on their screens when they're shopping for a movie. "Other search engines would group these two types of people together, but TOMAS allows us to distinguish between them," says Miya.

It's another way that Tsutaya is using evermore refined technologies to collect new details on customer habits and tastes and then crunch them more finely than before. "People's images about the lifestyle they want drive consumption, and all we are doing is turning those desires into a business," Miya says. "Making it all mobile helps us understand impulse buying and a new aspect of customer behavior."

This article was originally published on 02-22-2002
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