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Evidence-Based Marketing

The Definitive Guide to Retail Disruption

Posted by Matt Redlon on Dec 3, 2019

Have you ever walked into a department store and thought “I can get this cheaper on Amazon?” This situation has flipped the technology retail space on its head and almost killed Best Buy.  

In 2012, Best Buy was on the fritz. Sales were plummeting and so were its stock prices. Best Buy was quickly turning into a showroom for online retailers like Amazon. It had to fight back or die. 

One of the first moves was to change the way it thought about how it sold its goods. They did this by hiring CEO Hubert Joly in 2012. Hubert knew they needed to stop losing so much money to online retailers and give people an incentive to come to Best Buy. He helped the company do this in three ways.

  1. Best Buy announced a price match guarantee. While this would cost the company money, Hubert knew it was the first step to shifting customers’ mindsets from viewing it as a showroom. 
  2. Best Buy made deals with big brands like Apple. This helped improve the look and feel of the store by allowing big brands to create branded kiosks within the store.  
  3. Best Buy leveraged things customers already loved. It decided to take Geek Squad one step further by giving customers help before they made a purchase. 
  4. Best Buy improved its online presence. Hubert knew the internet wasn’t going anywhere and, after talking to employees, he knew they had to improve their online presence. 

By thinking differently about a problem that all retailers with physical locations face and adapting how it did business, Best Buy came out a winner. In January 2012, Best Buy was trading for $23 a share. Now they trade for almost four times as much. These same types of disruptions are happening every day. How is retail disruption different today? What can your brand do to act more disruptively? And how can you do all of this while protecting your core business? Let’s find out.

 

How technology is accelerating retail disruption faster than ever

57% of consumers prefer to shop online, 31% of consumers prefer visiting the physical shop, while 12% of consumers said both ways are the same for them.

Bizfeel

Most modern retail disruption is a result of the fundamental shift that’s happened in how consumers interact with companies. This shift happened with the adoption of the internet as a means of doing business. Customers quickly realized that interacting with brands online was an easier way to solve their problems and fulfill their needs. 

Today brands recognize that most of their products aren’t experiential. A customer doesn’t need to go into a store to test drive a new computer and most would prefer not to deal with a sales associate. Customers recognize that it’s easier to compare features, prices, and retailers online, and this ease-of-access to comparative information helps them to make better decisions faster.

51% of Americans prefer to shop online, 67% of Millennials prefer to do their shopping online.

G2 Crowd

It’s also become much easier to buy products to meet your one-time or ongoing needs. For example, Amazon’s one-click checkout lets you buy a new phone case in a matter of seconds. The process has completely removed the friction from buying small items online. Subscription models have also become common at big-box retailers like Target, allowing you to restock the items you regularly use without making a trip to the store. 

Social proof is another way that the internet has disrupted retail. In the past, consumers would typically buy from trusted brands and were hesitant to try anything new. Today consumers have access to social proof from blogs, unboxing videos, and customer reviews. This makes it easier for them to choose a relatively new, untested product over a more expensive legacy brand.

91% of consumers trust reviews as much as recommendations from personal contacts.

- Sleeknote

In the near future, we’ll see mobile continue to disrupt how customers buy from retailers. We’ll also see how new third-party services like Shipt integrate into retailers and drive innovation from outside the organization. 

As we look at these retail disruption trends, it’s clear that retailers aren’t driving their own decisions. Instead, this disruption starts and ends with the customer. Retailers who embrace this customer empowerment shift will succeed, while those who fail to do so are slowly dying. How can retailers deliver the customer experience that is right for their customers? 

 

Delivering a customer experience that is right for your consumer is at the center of meaningful disruption

One on one sales experience for customerPhoto by Christiann Koepke on Unsplash

“Since established brand names mean much less to consumers than they used to, the basis of retail competition is shifting from price and product superiority to privileged insights and customer experience. In light of this shift, there’s no doubt that physical stores can still be highly effective consumer touchpoints, but retailers need to think hard about the role of the store. Stores must be tightly integrated with the online channel, enabling online sales while simultaneously offering experiential features and cutting-edge technology that sets the store apart.”

- McKinsey & Company

True retail disruption isn’t a PR move or an attempt to keep up with competitors. Instead, it needs to stem from your customers.

But, focusing on customers doesn’t mean what you might think. Many brands think that it means focusing on a broad range of customers so that you can cast as wide a net as possible. This type of plan often backfires.

Instead, it’s better to research your current customers, your best customers, double-down on what they like, and deliver the brand experience they are looking for. This is what leads to more profitable businesses.

Beyond having a great product, if you remove all the buzzwords, it’s all about providing great service and great messaging that’s relevant and targeted… businesses knew that 50 years ago.

Kevin Bauer, Kessel Digital

Let’s take Patagonia as an example. Patagonia is a brand that’s known for being eco-friendly and mission-driven. It attracts customers who are adventurous, who care about the planet, and are willing to pay extra to reduce the size of their carbon footprint.

Could Patagonia succeed by learning about another retailer’s customers and trying to appeal to them? It might be tempting to try to compete with Burlington Coat Factory and increase market share, but doing so would water down the brand’s value and distance it from its current customers. Even trying to imitate a closer competitor like Columbia or The North Face could lead to problems.

Patagonia has smartly doubled-down on its current ideal customers. Its messaging, products, marketing, and initiative all mesh seamlessly with the mindset of someone who is adventurous and eco-conscious. This focus on the customer has led the brand to a billion dollar valuation.

 

Applying customer experience lessons to your brand

Many retailers fall into the trap of letting last year’s actions dictate this year’s marketing decisions. But, they should be basing decisions on two questions. Who are your best customers and why are they attracted to your brand? This is the question you need to answer to engage in the right kinds of disruptive activities.

Answering these questions requires a balance between qualitative and quantitative voice of customer research. You may gather qualitative data from customer interviews, focus groups, or employees that are on the ground. Then, you can verify your qualitative assumptions with quantitative data from behavioral data, analytics, and testing.

This research may lead you to realize that your customers choose you because the purchasing experience is frictionless. Realizing this may lead you to invest in new technology that enhances that differentiator. Or if you find that customers like your curated selection, you may spend more time trend spotting to stock your stores with unique items.

Successfully navigating retail disruption takes more than keeping up with technology changes. It also requires deepening your investment in your brand’s differentiators, so that you’re able to hold on to your core group of customers.

There is an additional component to surviving retail disruption. This component is what has allowed many retailers to come out of the other side of retail disruption stronger than before. What is it? It’s listening to your customers and embracing or building a moat to protect your core business. 

 

Four ways to survive and thrive in the face of retail disruption

Castle surrounded by a moat for better defense against attacksPhoto by Colin Watts on Unsplash

In his 2007 letter to shareholders, Warren Buffet compares businesses to castles. For the castle to survive repeated attacks it needs to have a moat, or multiple moats, to act as a defensive barrier.

Buffett outlines four moats that we see used over and over again in retail. When you combine the latest technology, with a customer focus, and the right moat, it gives your business a powerful defense against the onslaught of competition.

 

1. Leverage network effects

This best example of this moat is eBay. The platform is essentially a massive network of buyers and sellers coming together. The size of both user bases makes the product offerings naturally adaptive to supply and demand. And the presence of one group attracts the other. 

If these two networks hadn’t come together, eBay would have needed to create its own supply of products to sell and created demand through heavy investment in marketing. This would have added cost and complexity to the business that would have dragged it down instead of propelling it forward.

In recent years, large retailers like Amazon, Walmart, and Best Buy have created their own marketplaces. These serve to strengthen their product offering since niche sellers contribute greater variety to each company’s product listings. This, in turn, allows them to serve current customers more fully.

Leveraging network effects is more difficult for specialty retailers but is still possible. For example, Reverb has been successful in the more narrow niche of musical instruments. This clear focus makes it the first stop for musicians looking for their next instrument.

 

2. Develop scale economies or operational excellence

This moat is classic business sense. Become more efficient than competitors so that you can drive more value for your customer or brand. Within this moat, there are three famous examples:

  1. Walmart has achieved supply chain mastery, allowing it to offer products at much lower costs than its competitors. This mastery is nearly impossible for a new competitor to achieve, which is what makes it such an effective defense.
  2. Costco has achieved operational mastery in the efficiency of how it runs its business and drives value for customers and employees. 
  3. Amazon is famous in part for its distribution mastery. It is the easiest retailer to buy from regardless of where you live, which makes it a compelling choice for specialized and non-specialized items.

Just because these examples are all large retailers doesn’t mean that these moats are unattainable. For example, think of how Dollar Shave Club created a strong brand and offering by having a better supply chain and distribution scheme. The key is really to be creative and different in a way that pushes your specialty forward.

 

3. Differentiate via your brand

While social proof is eroding the power of the brand slightly, it doesn’t invalidate this moat. In recent years we’ve seen just how important a brand can be to success. We commonly see retailers embrace one of three differentiation strategies:

  1. Product superiority brands are companies that gain an advantage because of the quality of their products. Many of these brands are vertically integrated, both manufacturing and selling direct to consumers. These brands often favor Cause Marketing giving them a dual value proposition of quality and bettering the community. Examples include LVMH, Warby Parker, Lululemon, and Nike.
  2. Customer experience brands’ advantage lies with their superior customer experience. These brands have a higher frequency of contact with the customer and engage with the community regularly. Examples of high-touch experiential brands include Nordstrom, Home Depot, Best Buy, and Sephora, all of which sell collections of trusted brands in very curated spaces.
  3. Convenience brands get their edge from making the customer experience easy or convenient. For example, you have the “Frictionless” one-tap buy experience Amazon and the “Neighborhood” Walgreens experience with a store conveniently where you need it to be. 

Building a brand is difficult, but in the case of smaller retailers it can be the easiest moat to build since it doesn’t require scale or mass investments. As you build the defenses for your brand, think of how you will differentiate yourself even if it’s not your primary moat.

 

4. Raise switching costs

This final moat is the weakest, but it’s still worth mentioning. It relies on getting customers into some type of long-term relationship with your brand that’s difficult or inconvenient to exit from.

Costco and Sam’s Club both use a membership model. Signing up members generates revenue for each brand and creates a year-long commitment for members. The most likely scenarios are that the customer shops at the store more frequently to make the most of their membership, or they churn out without ever canceling or demanding a refund.

Rewards programs, branded credit cards, and online memberships (such as Amazon Prime), are a different flavor of the same model. They rely on creating a commitment with your brand to prevent customers from churning out as quickly. The only problem is this commitment can lead to what feels like an antagonistic relationship where the customer regrets ever engaging the brand.

 

Track, analyze, improve and grow your revenue

For true retail disruption, you need to listen to and understand what your customers are telling you. Retailers can only do this if they know how to convert their customers behavioral data into actionable insights. Clario helps retailers like you get more efficiency out of their marketing programs by understanding the nuances of their customers and how they need to be treated uniquely. Learn how you can start making better retail decisions today. 

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Matt Redlon

Written by Matt Redlon

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