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Access all areas – The Merchandising Report 2015

The age of the internet of things is upon us. But what does this mean for retailers and the business of selling? Giles Colborne, managing director with cxpartners, tells Jonathan Wright what lies ahead.

In an increasingly networked world, it really matters where the computers and other digital devices that connect to the internet are physically located. Why? First and foremost, because the location of such devices determines so much about how we conduct our day-to-day lives.

“It used to be that computing happened in special buildings, and then it was in special rooms in every office, and then it became on every desktop in every office, and now it’s it the palm of your hand on your mobile phone,” points out Giles Colborne, managing director of user experience specialists cxpartners. “The next thing is computing is happening everywhere, and computing is just part of everything. That means you’re shifting from computing being something you do on a device to something that enhances the way you interact with the world.”

Colborne is describing what’s been dubbed the ‘internet of things’. It’s a term that’s more than just piece of jargon, but embodies some big and important ideas. Think about any object that has a barcode. “If you see a thing today and it’s got a barcode on it – and remember even your fruit has a barcode on it – in the future that thing will be ‘alive’ and talking to the internet,” says Colborne, “communicating with you, able to tell something about its relationship to you.”

To imagine how this will change our public spaces, think about a train station. At the moment, much of the space is given over to buying and selling tickets. “In the future, the ticket part of that will just be irrelevant,” says Colborne. “You will walk into a train station and it will just recognise you, and if you get on the train you’ll start being charged, and when you get off the train you’ll stop being charged.

“There will be information services that will be required, information services that say, ‘Hey if you catch a later train, it’s going to cost you less.’ But that huge, heavy infrastructure of tickets changes, and the things that are important are you and the train and the destination, a really radical change in the way that we interact with the world. The world just becomes a lot smarter around us.”

This isn’t just science fiction. “It’s one of those things where the future is already here, it’s just not evenly distributed,” adds Colborne, referencing a famous quote by the cyberpunk luminary William Gibson. “You can kind of see some of what I’ve just said in Oyster cards. You don’t need a ticket to get on the London Underground, you [can even] just tap your bank card, and you’re in. That’s kind of like the future I’ve talked about, a clunky version of it, and it’s already here.”

The decline of ownership?

For retailers trying to cut through and reach consumers, the implications here are profound. In great part, that’s because, within such a world, we will move towards consuming services rather than buying objects – a shift in the way we do things identified at the turn of the millennium by economic and social theorist Jeremy Rifkin, whose The Age Of Access rather grandly posited a “new culture of hypercapitalism, where all of life is a paid-for experience”. It’s a shift too from an era of one-off payments to an era when subscription models will be increasingly commonplace, even the norm.

“You’re going to go from a world where you have a washing machine and you buy the washing machine, and then quite separately you buy detergent, to a point where the washing machine and the detergent are all part of the clothes-washing service that you buy,” says Colborne. “The washing machine is going to upgrade its software, it’s going to self-diagnose, it’s going to self-dose on the detergent and then re-order the detergent for you automatically.” Tell the machine you want to change detergent, perhaps because you’re allergic to a particular product, and it may even make suggestions about different brands to try.

Because this represents a completely new business model – essentially selling the promise of clean clothes rather than different items – this potentially has a huge impact on those currently selling groceries and electronics. “Retailers are used to getting products together in one place and selling them cheaply,” says Colborne. “If you’re selling services, you don’t sell on features and price. If you’re selling services, you sell on outcomes. It’s a different way of selling, it requires retailers to have a completely different mindset. It’s going to start to break down barriers to what have traditionally been completely different retail areas, between your supermarket and your white goods dealer.”

To catch a glimpse of the future, think about Apple’s move to have a direct presence in high streets and shopping centres, and view this not as a backward-looking step but a way, for want of a better phrase, to sell the Apple experience, a vision of machines that talk to each other and make life easier. “Apple is a great example of a company that sells outcomes, not products, not features,” Colborne says. “I think Apple’s frustration at retailers’ inability to position and sell its products correctly is what led Apple to create its own stores, and it needed to do that to explain the difference between its products and other people’s. [These stores] are the most productive retail spaces on the planet.”

Other high-end brands will follow Apple’s example. “The highest-value, highest-margin brands are the ones that are best placed to deliver the kind of high-value services that adding internet to products is going to create,” says Colborne. “If retailers can’t be good partners in packaging and selling those services, then those brands are going to need to go elsewhere.”

For some retailers, this kind of development will eventually represent an existential threat, especially if brands not only go direct to customers, but get choosier about which retailers should be allowed to carry products. Conversely, for those that adapt, learn to sell services rather than goods, there’s a huge opportunity. “The retailers that do this well will be ‘relationship retailers’,” says Colborne, “and that means they’ll be able to build very long-term revenue streams.”

For love of the thing itself

Yet all of this rests on the idea consumers will want to buy services rather than goods. Is that true? What about the rise in popularity of vinyl? Doesn’t that suggest people like the real world and physical objects? One way to square this circle is to think of buying and owning vinyl as an experience in itself, albeit a rather nostalgic one.

This in turn explains why so many vinyl albums are bundled with downloads or CDs. The underlying assumption is that, in reality, many consumers will play an album on a day-to-day basis via computer or smartphone. Furthermore, specialist music retailers such as Rough Trade are selling both vinyl and subscription services, where the company’s experts curate the best new songs and albums.

Even in old-fashioned retail then, the service model is gaining ground. Turning directly to the nitty-gritty of merchandising, this changes the way companies need to operate. Take personalisation. Quite correctly, and it’s arguably a necessary prerequisite to subscription-based selling, more and more retailers are targeting resources on getting to know customers, their likes and their needs. But what should retailers then do with this information?

Think about sending out promotional messages and vouchers. “There’s a slight paradox [here],” says Colborne. “As the cost of targeted marketing tumbles, then consumers are going to receive more targeted messages. That will make the messages increasingly irritating, so companies will try to make the messages more relevant to the people who are interested in a particular product at a time when they’re ready to buy, but if that becomes perfect you’re basically going to send messages or discounts to people who were going to buy anyway. Now you’re just cannibalising your margins on that business.”

In contrast, what retailers should be doing, says Colborne, is to add value by “aiming to solve people’s problems”. This changes the kind of messages that need to be sent out. In addition, if retailers have granular information about customers, there’s an inevitable temptation to try to sell these customers the kinds of items they’ve already said they liked. But what about the deeper art of merchandising, working out what customers don’t as yet know they want to buy?

It’s not just music retailers that are already using subscription models to help to solve this problem. “There are lots of clothing services, for instance, where you start off and you talk to a personal stylist,” says Colborne. “Then, as a subscription, that personal stylist sends you items of clothing every month, and you keep the ones that you like, and you send back the ones that you don’t like. So you could say those sorts of services are already here, and it seems plausible those sorts of services could expand and extend to other areas of one’s life.”

This is also another example of selling a solution, trying to make life easier. As the internet of things becomes more and more integral to our lives, the idea of retailers needing to make things easy for consumers will only become more important. The overarching point is that things will need to work. That’s what consumers will expect, because that’s what they’ll experience in so many other facets of life. Retailers

need to adapt to this reality.

“We’re heading [towards a time], where you can talk to your devices about how you’d like things to turn out, and your devices will predict and make suggestions, and it will just happen,” says Colborne. “You’ll have this tailored, thoughtful, timely outcome, but you’ll also have that without the bother of needing to anticipate and learn and monitor and check and set – and that’s really powerful.”

Privacy matters

To sell personalised services, retailers need to take the issue of data security far more seriously. “Customers have legitimate concerns about data privacy and data protection, and companies have not been good at protecting people’s privacy and protecting people’s data,” says Giles Colborne.

This will involve in change in perspective at many companies. “[Companies have] treated people’s personal data as though it’s an asset they own and they can sell, and people are becoming more and more angry and sceptical about that,” says Colborne. “But that data is what is required to power internet-of-things services. Companies need to develop much stronger governance and management of privacy

and security.”

If retailers don’t do this, there’s a risk the sector will lose access to this information. “Third parties who can be trusted to [keep data private and secure] will step in,” says Colborne. “Because that data is what powers the services, it’s a valuable thing. Well, companies had better start treating it like a valuable thing, otherwise they’re going to lose the very thing on which the relationship with customers is based.”

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