5 March 2018
It is difficult not to roll your eyes when you hear executives talk about “putting their customers first,” especially when their businesses behave like their customers are more of a burden than a blessing. Interestingly, companies that truly do put their customers first continue to benefit from an advantage that their competitors’ lip service fails to erode.
The truth of the matter is that customer-first as a discipline continues to be misunderstood and underestimated, but it's a legitimate and highly effective business strategy. Enabled by the evolution of customer data and customer data science, businesses can leverage their execution as a strategic and competitive advantage. How, you might ask? By scientifically identifying what matters most to customers and quantifying the ROI of delivering it to them.
To bring this to life, I’d like to shine a light on food retail — perhaps the toughest consumer market in the world, even more so in light of the many recent mergers and acquisitions in the industry — and show how product-driven strategies and metrics deliver inferior results when you ignore customers. In the end, the best metrics in food retail, as well as other industries like tech, focus on the customer.
Percentage Margin Versus Dollar Margin
In retail, there are two fundamental metrics that dominate thinking when it comes to profitability: Margin and profit and loss statements (P&Ls). With either metric, being customer-first provides the retailer with a distinct advantage.
Let’s start with margin. It is common today for many in the retail sector (including but not limited to food) to reward merchants on the percentage margin they deliver on the goods they sell. This is particularly true when times are tough and top-line growth is hard to come by, as is the case in today’s ultra-competitive retail environments. Unfortunately, this approach fails to take into consideration a broader view of the business that takes into account customer metrics like:
• The incremental and quantum dollar profit that a product delivers
• The associated dollar profit a product delivers (what else do people buy with it?)
• The profitability of customers that buy products (what’s the cost of losing them?)
Note that I didn’t mention loyalty once. I don’t need to because customer loyalty and customer profitability are almost perfectly correlated, a statement that has held true for the 30-plus retail brands for which I have worked. By evaluating customer metrics alongside product key performance indicators (KPIs), it is possible to make decisions that maximize total profit.
Channel P&Ls Versus Customer P&Ls
Now, let’s look at P&Ls. At a time of aggressive investment in new channels such as e-commerce, mobile, click-and-collect and last-mile service providers, it is common for retailers to develop business cases to assess the ROI of these channels. The traditional approach of assessing direct costs and revenues tends to create a myopic and siloed P&L which, again, does not factor in what they know about their customers.
Unfortunately, customers aren’t aware of the nuances of the retailer’s internal P&L structures, which is why they expect seamless experiences across channels and are unforgiving of differentiated pricing. On the other hand, if you look at the opportunity from the vantage point of the customer (taking care to avoid any clichés) it is possible to have a holistic view of the investment by asking:
• What is the profitability per customer in the new channel?
• How much is each customer spending incrementally in the new channel?
• How much profit is at stake if you lose these customers to a full-service competitor?
I’m not suggesting that capital expenditure (Capex) isn’t important. It is, in the same way that percentage margin is an important measure of efficiency. However, neither metric will help you understand what is important to your customers.
The emergence of affordable means to collect multidimensional customer data -- along with access to customer data science -- demands that businesses both understand customer needs and quantify the ROI of fulfilling those needs. It is no longer viable to simply mouth one’s commitment to being customer first. Fail to understand and deliver what your customers value, and prepare for them to find a retailer who can. This is the new normal across all industries.