Most of today’s retail CEOs learned about retail in the 1980s, when performance was measured purely in terms of physical transactions: costs, like-for-like sales, margins and stock turns. Retailers have always claimed that “our customers are at the heart of everything we do” but weekly board reporting packs have always been almost exclusively transactional, with little or no reporting at the individual customer or segment level.
However, it is no longer acceptable to ignore customers. Retailing is no longer prescriptive; it has to be responsive. The power balance in retail has shifted firmly to the customers—they can compare prices and services and they can demand that you engage with them in whatever way they choose. The friction that used to keep your customers loyal has evaporated. In 2002 someone predicted that “The days when your customers would stay loyal only because they didn’t understand the options are coming to an end.” Well, that day has arrived, and retailers need to embrace the new world of customer acquisition, loyalty, analytics and personalised service.
One of the main changes taking place is that retailers are now starting to measure customer acquisition and loyalty and the quality of those relationships. This shift from transactions to relationships is probably the most fundamental change in the new retail operating model.
Based on dozens of conversations with retail executives about the new retail model, we explore the ten key performance indicators (KPIs) which are driving the core changes in retail.
1. Return on investment (ROI) on marketing spend
The old joke told us that “50% of all marketing spend is wasted, I just wish I knew which 50%”. Businesses spent money on advertising and promotions and sort of hoped that it was all having a positive effect. When a customer visited a store nobody could ever be sure whether it was because of a specific advert or promotion because it was impossible to make the link.
Today’s digital marketing directors are able to measure accurately the effect of every pound invested, in terms of customer acquisition and spend. It is now possible to fine tune every marketing activity to optimise the ROI at every stage. It is no longer acceptable for Marketing Directors to avoid measuring ROI, and this is probably the most important KPI in terms of understanding how and why your customers engage with your brand.
2. Customer journey insights
In traditional store based retailing, we barely knew that a specific customer was even in our store, never mind what series of events prompted their visit. We knew how many white T-shirts we had sold, but we had no idea who bought them. Today, we can track every step of an online customer’s journey leading up their visit to our site and we can compare it with our knowledge of their individual history. With evolving mobile apps and in-store technology, retailers are starting to understand the customer journey related to physical stores and how customers shift from one channel to another. By combining a detailed knowledge of each stage in the customer journey with analysis of what marketing activity drives each step, retailers can now develop a rich understanding of how and when to engage with customers in order to build loyalty and long term value. We are starting to see major retailers hiring “Customer Intelligence” experts to develop these skillsets, and new technologies such as Attest market research which allows retailers to gather and analyse increasingly rich customer data to improve decision making around products and services.
3. Brand reputation
The growing platforms of social media now allow retailers to see what their customers are saying and thinking about them in real time. In the traditional retail model, this was never visible and so many retailers developed a somewhat cavalier attitude towards customer service. Today’s world is different, customers give detailed and extensive feedback on how your brand is doing and they share this with the world. Any retailers who are not paying attention to these channels and responding in a proactive way are heading for trouble.
Social and net promoter scores, product and service reviews, twitter comments, and instore analytics – these are all essential measures of how your brand stacks up against your competition and how your customers see you.
4. Customer availability scores
A major component of the customer experience with your brand is availability of product where, and when they want it, whether in store or delivered to home. In the traditional store based model, lack of availability was neither measured nor addressed by most retailers because the customer was anonymous and silent. In today’s digital multichannel world availability is a key requirement for most customers and retailers need to measure and manage it much more effectively. The concept of “lost sales” used to be a virtual unknown, but with the data retailers have available today, lost sales can be measured to a high degree of accuracy and the potential value of customers satisfied more consistently can be understood. Smart retailers are using flexible channel options to improve overall stock availability, which in turn is driving much higher levels of loyalty and repeat purchases from their customers.
5. Customer profitability
Traditional retail was all about product sales and margin. In general, retailers knew very little about their individual customers or what they thought about the brand. Things are different now – if you don’t know who your most valuable customers are, and what they really think about you, you are going to lose them. Retailers can now segment their customer base by total spend, profitability, basket size, frequency of visit, and with this information can surgically target all their marketing and loyalty investments. In today’s world, if you ignore your most valuable customers they will soon find someone else to take care of them.
6. Channel profitability
This is one of the biggest challenges for large retailers, especially the large supermarkets where low margins do not offer the headroom for all the high costs of online ordering / home delivery / click and collect. As retailers invest ever more in online technology and logistics, they need to make sure that any resulting short term operating losses don’t start to affect overall business profitability. Where retailers are incurring costs in particular channels, for example in-store picking for home delivery, all these costs must be correctly allocated to that channel. Where retailers are assuming that growth in the online channel will eventually lead to bigger market share and profits across all channels, these projections should form part of a detailed business plan and should be tracked very carefully to see how accurate those assumptions really are. Currently, very few retailers break out their P&L by channel in the same way that most do for individual stores.
7. Store productivity across channels
Most retailers are seeing gross margin return on space (GMROS) declining as customers shift to new channels and general price deflation continues apace. Most would agree that the UK has too much physical retail space in total, putting further pressure on overall returns. This growing challenge of declining store productivity requires ever more accurate management of costs and return on space. Efficient labour scheduling; detailed measurement of space productivity; local assortment flexing; conversion; and innovation in new trading formats and use of space are all key elements of this increased drive for productivity. Return on space is no longer simply about sales per square metre – stores now act as a customer hub for engagement across all channels, and this should be reflected in a more sophisticated approach to GMROS, for example click & collect. It is no longer satisfactory to keep the channels separate when looking at store performance.
8. Pace of innovation
Traditional retailers have always taken a long term view of technology and innovation. New systems projects often take several years to implement, and are expected to support the business operating model for anywhere between 5 and 10 years. In today’s fast changing world, where technology innovation and new devices are changing every week, such an approach is no longer acceptable.There is no longer any such thing as a “five-year IT strategy”. Retailers need to take a much more responsive approach to innovation if they are to reflect the increasing rate of change in customer requirements. Rapid and agile adoption of new technologies, and the level of customer engagement that these create, are now critical measures of success. The traditional model of centralised IT Departments is becoming less and less relevant, and businesses which operate localised guerrilla development teams, generating high levels of innovation, are better placed to keep pace with today’s customer expectations.
9. Organisational KPIs
The traditional retail model is too often based on operational silos, often with conflicting KPIs creating multiple operational tensions between different functions. Into this structure, the “ECommerce” and “Digital” departments have been born, often creating even more operational conflicts as a result. For example, many retailers now find their store margins are being hit by online promotions requiring price reductions in store to maintain common pricing across channels. Whilst the margins are owned by the core buying teams, it seems that price promotions can be actioned by multiple parties across the business, often by people who have no ownership or accountability for achieved margins. It is now time for retailers to take a fresh look at their organisational structure and KPIs to make sure that silos are minimised; roles are clarified; and KPIs are fully aligned across all departments.
An integrated approach to developing roles and KPIs across the business is required. E-Commerce is no longer a separate “bolt on” to the traditional business, it has created a need for a whole new multichannel structure, reflecting the way today’s customers want to engage with retail brands.
10. Supplier KPIs
Retailers have long understood that the inefficiencies of a non-transparent supply chain (e.g. inefficient demand forecasting and inventory planning) results in cost bulges both upstream and downstream. The advent of multichannel retail invites much greater participation of suppliers in areas such as inventory maintenance and direct delivery. Greater exchange of transactional data between retailers and suppliers offers many opportunities to minimise the inefficiencies inherent in the traditional supply chain.
12 September 2016