As Retailers Focus on ‘Customer Experience,’ Most Profitable Shoppers Ignored
Data from Dynamic Action shows a steep decline in "customer profitability" as retailers look at the overall shopping experience instead of taking a more tactical approach.
In Dynamic Action’s latest “Retail Index” report, data culled from more than $12.4 billion in global transactions year-to-date, shows an 8 percent increase in free shipping, but a decline in customer profitability. The retail analytics firm said the jump in free shipping reflects the efforts of North American retailers to focus on improving results by deploying “strategies to emphasize customer experience,” as a way to remain competitive. “While retailers continue to drive conversion from first- to second-time buyers, it is those shoppers that make between six to 10 purchases who represent the biggest profit opportunity.” That missed opportunity is impacting the bottom line as overall customer profitability continues to decrease, dropping 4 percent year-to-date, researchers at the firm said in their report. “The findings show that despite marketing spend increasing 25 percent compared to the same time last year, new customer acquisition decreased by 11 percent,” the researchers said.
John Squire, chief executive officer and co-founder of Dynamic Action, said that for brands and retailers to stay relevant and protect profit margins, “it is imperative [for them] to act at pace, constantly strive to understand the most addictive product combinations to encourage full-price sell-through, and feverishly deploy strategies offering services such as free or expedited shipping to its profitable and highly desirable customer set.”
Squire said the more forward-thinking retailers “realize that to provide a differentiated retail experience, they need to push further down the path of digital transformation to keep their most valuable consumers.”
Moreover, responding to the needs of shoppers “in the moment” is essential. “Industry giant Amazon is providing a masterclass in harnessing rich behavioral data to reach consumers at the moment of purchase desire with a value proposition and financial structure that is stunning the industry,” authors of the report said.
The ceo told WWD that the results of the index show that retailers are “getting better at selecting and personalizing the assortment of products they offer — the data shows the amount of inventory not being viewed has decreased by 12 percent compared to the same time last year. However, despite this, retailers have struggled to stem the decline of customer profitability.”
“To ensure success, it is clear North American retailers need to make strategic shifts across their businesses, serving smarter and more personalized experiences to each and every customer,” Squire explained. “In this way, retailers can empower their people by harnessing rich behavioral data to improve profitability.”
When asked how brands and retailers might be able to mitigate the variable costs of e-commerce and its impact on profits, Squire told WWD that the key is to “focus on making surgical decisions that are centered on customer profitability and inventory efficiency.”
“Firstly, by understanding which customers are most likely to deliver profitability on a long-term basis — not simply those who make a single purchase — retailers can ascertain how best to treat each consumer to protect profits,” Squire said. “Secondly, by discerning the profitability potential of inventory at the most granular level — at any given point in time and across all channels — retailers can make decisions with precision to counter the increasing variable costs of e-commerce. It is a progressively difficult decision matrix for retailers and, if today is difficult, tomorrow won’t be any easier.”
By way of a case study, Squire described a $7 billion global retail brand that “drilled down in an analysis of the company’s item-level data and the correlation to average order value. The retailer found that luxury robes were among the top 10. One, in particular, had a 20 percent overlap with a high selling intimates, and these products together had a very high full order AOV.”
The analysis also showed that these items were not consistently marketed and merchandised. “Online, the luxury robe was recommended on the intimates product description page, the inverse was not true, and these products were not marketed together in campaigns or promotions.”
Squire said the ceo was intrigued and wondered how this data could be used in stores. “Following strategic discussions, it led to the retailer taking in-store actions including placing the robes in fitting rooms and altering displays,” Squire said.