From crystal meth to crystal math (IRM57)
Michael Ross, Co-Founder and Chief Scientist, DynamicAction shares his view of the role of the merchandiser in a customer-centric world.
Many retailers are making grand statements about their newfound customer-centricity. However, the reality of what that means in practice is still widely varied, often confused and can be devastating to a business if they get it wrong. The quick fix “crystal meth” of customer promotions has to transform into the longer-term healthy growth driven by “crystal math” reports and metrics.
The role of the merchandiser is critical. They turn stock (a.k.a. inventory) into cash, and maximise the gross margin in the process. Most merchandisers often feel immune to the responsibility of customer-centricity – they get the need to change, but think it is someone else’s problem. In fact, they need to be at the heart of the transformation, and only retailers who recognise this, and change behaviours quickly, will be the winners of the future.
However, the reason so many retailers are getting this wrong is that there is no easy fix – this is a complex shift requiring significant organisational change in behaviours, capabilities, decisions and systems. The very heart of customer centricity is the ability to connect, understand and take action on the myriad data across a retail organisation. In this new world of retail, the merchandiser must corral their colleagues, and champion both the processes and technology to transform themselves into Merchandiser Scientists.
WHY MERCHANDISERS HAVE TO CHANGE
Digitally-enabled consumers have changed the economics and dynamics of retail. Consumers have almost unlimited choice, and are both empowered and informed. They are using a range of devices, being bombarded by digital marketing and are shopping in new and complex ways. Importantly, they also now leave a “digital exhaust” – the trailing breadcrumbs of every impression, click, view and basket addition. This dynamic drives intense competition as retailers compete for every potential customer. It’s great news for customers, who rarely have to wait long for a new offer or promotion.
The changes in consumer behaviour are catalysing four tectonic shifts for merchandising:
z New costs. Costs are driven by a new set of variable marketing costs (per impression, per click, per transaction) and variable “per order” costs (picking, packing, postage, returns) replacing the more fixed costs of staff and rent. Profit no longer correlates with revenues.
z New revenue drivers. Revenue is now driven by customer acquisition and retention, a more complex dynamic than the traditional like-for-likes. This often leads to over-ambitious revenue targets that are not based on a bottom-up customer-based forecast.
z New levers. Merchandisers have a new set of tunes to play. There is a new arsenal of 30+ actions that the merchandiser can take (or influence) across areas, such as product-specific marketing, site landing pages, product sort orders, recommendations and product copy.
z New data and decision logic. Consumers create a tsunami of data for managers to use – their digital exhaust has millions of data points. In particular, merchandisers now need to decide if the next pound is spent on a product markdown, or product-specific marketing.
Despite these changes, most merchandisers have failed to adapt. In the world of physical-only retail, products either sell or don’t sell. The weekly cadence of reports – focussed on stock and sales data – is good enough to drive actions. These actions are limited and relatively blunt: markdown/promote, pushback/accelerate/cancel deliveries, move stock within or between stores. The role of the merchandiser is central to making sense of the data, then taking and coordinating actions. A role that has always been a blend of art and science, relying on “good enough” data, combined with experience and intuition. Many retailers are still relying on the traditional weekly trading rhythm and often find themselves in trouble:
Reports no longer drive the right actions. Merchandising reporting has a bad reputation in the digital world: the challenge for the merchandising teams is that looking at stock/sales to diagnose an online sales issue is like trying to fly a plane with a car dashboard.
Actions are being taken that are detached from reports. Increasingly by various types of automated systems – such as product feed engines, site search engines, fraud, Google bid management, retargeting and product recommendations. So retailers are flying blind in their management
The harsh reality is that it’s now nearly impossible for the merchandiser to stay in control. It has been described to me like being the pilot of a fly-by-wire 747 – if everything’s going well, you get lulled into a false sense of control; the moment something goes wrong, you have no idea which lever to pull.
The addiction to promotions
Retailers often default to discounts and promotions as the only way to drive sales – from explicit price promotion, to the subtler promotions of free delivery, cash back affiliates and order-level promotions (which don’t get reflected in gross margin). Promotions give you a short-term hit: they drive revenue and clear stock. But they train customers to wait for the next promotion. The effects – as many high street retailers are seeing – can be devastating to medium-term profit and brand equity.
But merchandisers are now making these decisions in an entirely new context: they have near real-time data on each customer’s product views (their digital exhaust). This may seem like a small change, but it catalyses a fundamental transformation in the role of the merchandiser and the analytical complexity of their task. They know for every product:
z How many times it’s been viewed and whether the views turn into sales?
z Which customers have viewed it: their size, spend history, likelihood to purchase?
z The source and cost of those views?
This data is the essence of customer-centricity. The challenge to the merchandiser is what to do with all this data?
The power of reports
There is a new set of reports that need to be part of the Merchandiser Scientist Toolkit. When done right, reports explore metrics, drive the right conversations and lead to successful actions. For each report, there is an associated metric that can be looked at over time to get a sense of the scale of the opportunity and whether things are getting better or worse.
A large suite of reports are required to manage the multi-dimensional nature of the digital world. For example:
The tactical reports:
z What products are not being viewed (metric: inventory value not viewed)?
z What products are being viewed, but not purchased (metric: inventory value viewed – not sold)?
z What sold out products are still receiving views (metric: number of views of sold out products)?
The weekly questions to ask:
z Are we staying in-stock of our bestsellers (metric: demand-weighted availability)?
z What’s the customers’ experience of availability (metric: view-weighted availability)?
z Which products are overexposed or underexposed (metric: profit per product view)?
Some strategic questions to ask:
z What products are first purchased by customers who become high value customers?
z What products are addictive (i.e., get frequently repurchased by the same customers)?
z Where are we systematically missing opportunities on fringe sizes?
These reports and insights highlight another challenge for the new Merchandiser Scientist – the things that used to be optimised in a silo, no longer make sense. In the old world, the merchandisers could do their job independently from marketing and store operations. In the digital world, these three critical roles are interconnected. “Triangulation” meetings are a vital feature that bring together the merchandiser, site and marketing teams to optimise how they trade.
Many merchandisers recognise the need to think differently, but are still making the same decisions, in the same organisational silos, with the same logic and on the same frequency as they’ve always done. They are then surprised that nothing changes. The Merchandiser Scientist of the future must think differently.