There have been signs recently that the upcoming holiday season will be difficult for many retail companies.
Headlines such as:
- Nordstrom Inc. Is Down but Not Out
- Dillard’s Inc. Misses 3Q Earnings: Another Retailer Down the Drain
- Macy’s, the largest department store in the U S also plummeted last week….
We could go on and fill the next couple of pages with similar headlines, however for the most part, the message is the same. This holiday season will be a major challenge for most retailers. Our blog last year at this time was titled “The Perfect Retail Storm” where we discussed what retailers should be doing now to manage through the season and maximize profitability.
There Are Growing Signs …
This season, it appears things are different. There are growing signs that consumers have changed and the way they are shopping not only during the holiday season, but year round is much different. Retailers must now face the possibility that the consumer landscape has changed so rapidly, they must look at their business from a much different perspective.
We have worked with many retail companies over the years and a major factor in establishing a base line for profitability is understanding consumer behavior. The challenge now for every company regardless of size, is to understand its customer and how their behavior is changing.
Every Business Has A …
Let’s pause for a moment and point out that while we have been discussing recent developments in the retail world it must be acknowledged that EVERY BUSINESS has a consumer. Regardless of their type of product or service companies either sell directly to consumers, sell to distributors or sell directly to businesses.
Let’s take for example one of our recent clients that sells apparel directly to the retail consumer, or the company in the marine product industry that sells to distributors, or the company that sells software services to businesses.
In order to maximize sales and profitability each of these companies have a consumer who makes decisions to purchase products and services. It is important to understand what motivates their consumers to purchase and what might happen in the future that will change the way they make decisions to purchase.
Understanding What Motivates Consumers …
One of the best methods to understand what motivates consumers is called customer segmentation. Not all customers purchase for the same reason. Some are motivated by: the quality of the company’s product or service; some are motivated by the expertise in its industry; or some are motivated by price.
Most companies have the ability to analyze and rank their customers by sales and profitability. It is imperative that companies periodically assess their customers and understand how they differ. Doing so will not only help them understand how each customer contributes to their company’s profitability, it will also provide vital strategic insight.
Understanding the attributes of their best and most profitable customers will help them make decisions regarding product assortment, new product development, pricing and effective marketing programs.
Some Key Analytics …
The following are some of the key analysis that can be used to segment and understand customer’s behavior:
- Rank the traveling twelve month sales and profit contribution of each customer. Give extra weighting to customers who have high sales and high profit contribution. If customers rank high in sales, however rank significantly lower in profitability, understand what is driving their behavior
- Rank the length of time a customer has been purchasing from your company. Give a higher weighting to the frequency customers have purchased from you. Higher frequency ranking might suggest they are purchasing more out of need than a result of lower prices
- If possible, understand the origin of the sales order. Are customers calling the order desk or ordering through your website, in lieu of being contacted by a member of your sale force? If so, there may be an opportunity for higher sales, if they had been contacted more frequently by someone in the sales department. It might also indicate that a sales representative in a particular area is not contacting customers as frequently as they should.
Rank customers by average sales and profitability. Customers with higher average sales and profitability can be profiled to understand the underlying reasons for their level of purchase. This information can be used to refine marketing programs to target new customers that have characteristics similar to the existing higher profit customers
- Measure and rank the number of new customers that are brought on board each year. Remember a healthy company must bring on board a proportionate number of new customers. It is inevitable that a portion of existing customers will stop purchasing, for a variety of reasons, so new customers are the lifeblood of a healthy business
Customer Segmentation …
The factors noted above represent elements of segmentation that we frequently use in our work with our clients. It is really important to understand these factors and identify the appropriate segmentation as it relates to a particular industry or type of business.
This type of analysis is important to understand the health of the business and to develop plans to strengthen profitability and the underlying customer base.
Remember every business has customers, regardless of whether you are a retailer, manufacturer, distributor, law firm or a health care provider. Understanding the psychology and behavior of your customer will allow you to make the appropriate changes in your business to improve sales, profitability and maintain long term viable customers.
Ignoring these factors most likely will result in your business becoming a “HEADLINE YOU CAN’T IGNORE“!
