By: Shah Karim, CEO, SafeRock
2015 has been an exciting growth year for Internet retail. Total U.S. retail sales were $4.195 trillion for the 12 months ending in August 2015, with $471 billion, or 11.5 percent, coming from non-store sales. While physical store sales grew an anemic .3 percent, online jumped 14.1 percent year-over-year. Fear of Amazon clouds the path for retailers, and even for stalwart venture capital firms, who now steer clear of investments that fall in the shadow of the Internet giant with 2015 sales that will exceed $100 billion.
In light of this challenge, brands and retailers need to be more diligent than ever in using the Internet to improve results and align to new consumer behavior.
Challenges for Physical Retail Stores and Brands
Physical stores are still vitally important for the U.S. economy, providing jobs and a cornerstone for local communities. According to the Bureau of Labor Statistics, 15.7 million people were employed in retail trade as of August 2015, which is over 11 percent of U.S. non-farm payroll.
Traditional retailers, however, face intense challenges from new shopping formats and increasingly efficient online transactions. Shopping and shipping is more convenient now with Amazon Prime Plus and two-hour delivery, Walmart’s new home delivery for $50 per year, Kinko’s locker pick-ups and more direct selling by brands.
Brands promote emotional appeal and attach this to the items that customers touch. Quality, reliability and value are core to their appeal, but brands face the challenge of how to reach and engage customers and distinguish their message in the midst of all the noise online. This crowding can hurt brands with customer credibility, which is what matters the most to them. Quicker transactions and cheaper alternatives are disrupting their attempts to build enduring relationships with the customer.
Management at retailers and brands need to be realistic about goals and measure progress within a financially accountable framework. In this context, knowing the true return on investment enables merchandising and marketing to clearly separate winners from losers. Accordingly, businesses should use key performance indicators that emphasize financial return on investment, as these help current staff to improve day-to-day decisions.
Maximizing Profits
Avoid attribution analysis: E-marketers and advertising agencies have fed clients the hope that it is possible to have an exact attribution of impact and exactly identify the factors that influence the customer’s path to transaction. They propose that by tracking the customer’s online activity, one can completely identify the path to purchase. Once this is done, supposedly, the client and agency are able to precisely target and influence customer behavior. This would solve the marketer’s dilemma of selecting where to spend marketing dollars and justify with rigor the return on investment of these decisions.
While the concept was exciting, attribution analysis has fallen far short in the real world. With multiple devices and people in a household, switching and multiple entry points have made it virtually impossible to properly identify the sequence of steps in the path to purchase, much less measure causality. This is painfully obvious to those who have analyzed the data with statistical rigor.
Harness performance in a combined way across all channels: If attribution analysis does not work, what can be done? By regularly and systematically measuring the return on investment of all marketing and merchandising programs and customer-facing offers across all sales channels, management can focus on increasing sales, conversion and profits instead of being buried in reports or trying to attribute shopping behavior to different personas.
Management can use the channel and event analysis mentioned above to optimize budget allocation and maximize profit. Profits are at their maximum when marginal revenue is equal across all expenditure categories, as explained by economic theory of the firm. Accordingly, the company should invest more where marginal returns are higher than average, and reduce investment where marginal returns are lower.
Applying this core economic principle improves profits, optimizes budgets and increases shareholder value. This is the core of promotion optimization and efficient capital allocation. Systems that calculate these metrics (over millions of SKUs and billions of transactions every week) improve brand, store and online sales and profits in an integrated way.
Accelerate ROI with analytics: Whether developed in-house or sourced with partners outside the company, analytics are very valuable. SafeRock case studies confirm that such use of (Big) Data improves square foot sales, optimizes inventory dollars and increases ROI.
Retailers and brands have taken this further by working with companies such as ours to strategically and systematically optimize promotions for merchandising and marketing. This system measures SKU-level sales and profits, and then analyzes incremental returns on incremental spend for marketing. This can be extended to store space allocation and use of working capital. It has proven very effective in improving decisions and return on investment.
Create value for shareholders and partners
Systems such as promotion optimization put laser-like focus on profits and improve free cash flow. They accurately inform how much additional sales and profits specific brands bring in, and how much more productive one offer or promotion is over another.
Shareholders benefit when retailers and brands measure sales and profit return on investment with accuracy and share this information with each other. While such measurement requires technical expertise, it can be completed in a reasonable, low risk manner.
Better promotion effectiveness makes retailers and brands more attractive to customers. It builds loyalty, strengthens the brand and improves profits. In this context, emphasis on financial accountability connects customer engagement to shareholder value. Eventually this all leads to a closer and more valuable relationship between brands, retailers, and the customer.
Shah Karim is the CEO of SafeRock (www.saferockretail.com ) and welcomes any comments on this article at shah@saferock.com. For more than 20 years, he has advised retailers on digital transformation, cost reduction, and turnarounds. He has developed systems and algorithms to precisely measure retailer ROI performance, Big Data analytics, personal learning, and enterprise content management. Mr. Karim began his pioneering research on index numbers at Yale University and continued this work in Geneva.