C

tricity er Cen ustom

The dawn of a new era in Organized Retail Sector in India, 2011-2012.

Customer Centricity through Data Analytics: The recipe for success The success of many retailers across the world and the failure of others can be attributed to one major silver bullet how well has a Retailer changed its organization to become customer centric, by collecting and analyzing customer data and making strategies based on insights gleaned from the data. This outlook explains why it has become imperative for the organized retail sector in India to embark on a journey of customer centricity and how they could go about doing so, by an effective use of customer data.

www.technopak.com
a quarterly report by technopak September 2011

Retail & Consumer Goods

Contents
Design & Development Bharat Kaushik, Sr. Design Manager I bharat.kaushik@technopak.com I +91-9811661493 Arvind Sundriyal, Senior Designer I arvind.sundriyal@technopak.com I +91-9910493934

01

OVERVIEW

09 11

COLLABORATION BETWEEN RETAILERS AND SUPPLIERS

PRICING STRATEGY

15 17

03 05

CUSTOMER DATA

LOYALTY STRATEGY

CUSTOMER CENTRICITY CHECK

CUSTOMER CONTACT STRATEGY

13

PROMOTIONS STRATEGY

ABOUT TECHNOPAK

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Outlook Sep, 2011 | Customer Centricity

Overview
The Organized Retail sector in India is now poised at an interesting stage in its life cycle. After the initial mad rush to identify real estate and open new stores, the Retailers are now looking to consolidate and make their mark on the consumers. The Indian consumers are fickle; deals can drive them to the stores once in a while but that does not ensure sustained loyalty. Only those Retailers can be successful who make an effort to understand the mindset of the customers. Today a new challenge beckons the Organized Retail Sector in India and it is not from the rising prices of the real estate. It is the challenge posed by the loyalty of the Indian consumers to the Kirana stores, to the Thelewalas, to the mom and pop stores. For long, the Indian consumer has been denied, the best of retail experience that the world has had to offer. It changed dramatically with the introduction of Modern Retail outlets, presenting a one stop shop solution for the time crunched, new generation of Indian consumers. But, the innovative Kirana shop owners fought back with small gestures to build back loyalty home deliveries, sale on credit, discounts and personalized treatment of consumers ensured that the consumers flocked back from the Modern Retail outlets to the Kirana shops. The visits to the Modern Retail Outlets got reduced to shopping for non essentials and not for the major, regular grocery needs as far as the consumers were concerned. Now the time has come for the major Modern Retailers to change the game forever. The Retailers who are able to create a special personal bond with the customers, akin to what the Kirana store owners have been able to create, will be the ones who would win the race. The challenge is to train your employees to remember customers on a first name basis, have goods delivered to their houses purely on the basis of a phone call, give credit to your customers on goods purchased etc. etc-the list goes on. Well, the truth is that for Organized Retailers, this kind of personalized service wont be possible. What then is the best alternative to combat this strategy of the Kirana/small shop owners? There is no silver bullet for this, but what one can do is to emulate the strategies of some of the most successful Retailers in the world it is based on a simple philosophy called Customer Centricity. Technopak takes a look at what Modern Organized Retailers in India should do to stay ahead of the competition in the coming years and how they can be customer centric.

Modern Retail outlets are presenting a one stop shop solution for the time crunched, new generation of Indian consumers.

Outlook Sep, 2011 | Customer Centricity

What you already know about your customer.

Chapter 1

Customer Data
The most fundamental aspect of developing customer centricity is to understand the customers and for this, collecting data on who they are, what they buy, when they buy, how they buy, etc. is of paramount importance. It is very important for Retailers to set up robust and excellent processes which will enable them to collect customer data. One of the biggest drawbacks that the Indian Retailers have is that their existing systems and processes have not been built to capture customer data or link it to the transactions. The EPOS systems do not have the ability to either capture customer information or even if they do, the staff is not trained to collect their details like Loyalty Card number or phone number (which can be used in lieu of Loyalty Cards). The Retailers must realize that data is their most fundamental asset which will eventually help them drive their sales.

What you could know about your customer, but dont

The current EPOS systems do not have the ability to capture customer information.

Outlook Sep, 2011 | Customer Centricity

Customer Contact Strategy

Existing customers are the most valuable customers with whom Retailers/Suppliers should build preference.
Developing an effective customer contact strategy is the key to build an enduring relationship with a consumer. In the fast paced modern world you are competing with hundreds of others for catching the attention of your consumers. You will only be able to do so successfully if you have a differentiated offering and if you deliver value. It is a known truth in the world of Marketing that acquiring a new customer is always more difficult than retaining an existing customer. From a value proposition point of view, one customer with a strong preference for your brand is worth at least 12 new or uncommitted customers. The Committed or Loyal customers are your most profitable customers as they tend to buy the product at full price and they deliver a significant increase in marketing ROI as compared to uncommitted customers. Hence, for brands the biggest value doesnt come from acquiring new customers but from systematically growing and nurturing a strong preference for their brand in existing customers. Here is a very popular chart which shows repeat purchase behaviour of customers with respect to brands. The shape of this chart is consistent with most brands.

Chapter 2

Every contact we have with a customer influences whether or not theyll come back. We have to be great every time or well lose them.
-Kevin Stirtz Building the existing customers preference for the brand is crucial for ensuring long term success and growth. The most successful and proven method for driving desired customer behaviour and make them choose your brand over others is to communicate with them in a relevant and personalized manner. Irrelevance leads to junk mail and rejection of the offers that you may have for them. Successful retailers the world over have perfected the art of communicating with the right customer, at the right time, with the right message through the right channel. It maybe a personalized

3 No. of Visits

5+

The polarization shows that a large number of customers have bought into the brand once or twice and then there is a substantial decrease in number of repeat purchasers. But at the other extreme there is a group of customers who frequently buy into the brand. It is this loyal customer that one needs to nurture.

Outlook Sep, 2011 | Customer Centricity

catalogue, offers on the products that they buy most frequently, discounts on things that they like et al. Now, given that it is so simple and everyone should be doing it, why isnt everyone doing it? The answer is that to make it happen requires great expertise and skills on using the customer data, implementing the right customer contact strategy and then coming up with the right and relevant periodic communication with the customers. Few companies in India have professionals with the required skill to deliver such customer contact strategies.

On how difficult it is to reach potential customers through traditional methods of advertising can be attributed through this saying by John Wanamaker.

Half the money I spend on advertising is wasted; the trouble is I dont know which half.
This famous quote fully encapsulates the predicament of companies but they still continue to spend an extraordinary amount of money on advertising in a desperate bid to stand out in the crowd and make a statement. The biggest problem with advertising is the problem of relevance and personalization.

The numerous ads on television and print media are largely ignored by people. People frequently switch channels when ads are shown, while they ignore or merely turn over the pages which carry ads in newspapers/other print media. The newspaper inserts or add-ons/leaflets that come with newspapers are frequently consigned to the waste paper bin. This behaviour is symptomatic of people, both in the western countries as well as in India. Now compare this with a relevant and well executed customer contact strategy the extremely popular Quarterly Statement from Tesco in UK, which has customers eagerly waiting for their rewards, vouchers, coupons in the statement, which are tailored to their buying behaviour. To create this scale of popularity and impact of their customer contact strategy, Tesco did a massive step change in their thinking from the traditional What I want to promote to my customers? to a radically new, What do my customers want? In 8

this new paradigm, you let the data show you which offers to chose for the customers. The tremendous value of an effective customer contact strategy is that you can measure the exact and immediate return on your marketing investment in the sales that follow it. The fact that you can measure the ROI on your investment means that you no longer have to rely on vague measures like cost per visual on a mass media ad where the benefit is measured in how many people saw the advertisement. But seeing an advertisement does not necessarily translate to a purchase and there is no way to link it. With a well developed customer contact strategy there are a number of key metrics that will help measure the ROI v.i.z.
Redemption Sales Uplift Rateper offer Redemptio Rate per chanel of comuncation Incremental Visits

Why a well executed customer contact strategy delivers more value than advertising?
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Outlook Sep, 2011 | Customer Centricity

Collaboration between Retailers and Suppliers

There are numerous areas in which the Suppliers can collaborate more effectively with the Retailers to create value for the consumers, but the biggest area of mutual collaboration is in targeting the consumers with relevant offers. The Retailers can help the suppliers use their data asset to effectively target the loyal consumers with relevant offers. The very fact that the ROI can be easily measured from these promotional campaigns is reason enough for the suppliers to be interested. The added value is the ability to drive brand loyalty for their products and hence boost sales.

Chapter 3

Retailer Data

Customer Contact Strategy

The Retailers can help the suppliers use their data asset to effectively target the loyal consumers with relevant offers.
10

Supplier Investment

Outlook Sep, 2011 | Customer Centricity

Loyalty Strategy
Chapter 4
Loyalty Programs do not drive Customer Loyalty - It is an all too familiar phrase that one hears from the Retailers. The Retailers in the west learnt it the hard way; before they realized that Loyalty Programs are a means to collect customer data to understand the customers. The strategies that you build based on the understanding of the customer data can drive Customer Loyalty but not the Loyalty Program per se.

rules that put your loyal customers at the top, recognize and regularly thank loyal customers with relevant offers and rewards and develop such a mechanism for customers which will put the items that they buy most, on the top of the list of offers that you make to them. The reasons why most loyalty programs fail can be summarized as follows: Emphasis on trying to force offers on customers that are irrelevant to them. Trying to acquire new customers while ignoring the potential to increase the share of wallet of existing customers. Very primitive targeting algorithms which completely ignore the buying behaviour of customers. No customization of the offers i.e. same offers are made to everyone. No collaboration between the retailers and suppliers. The potential for Retailers in India to learn from the mistakes made by the west and adopt the best in class Loyalty Approach for businesses is immense.
Personalized Periodic Customer Centric Targeted Relevant

In Search of Loyalty
Organizations which have ingrained a customer centric approach to drive customer loyalty have some common underlying objectives: Increasing share of wallet Increasing the frequency and spending of the customers with respect to their brand Word of mouth advocacy for their brand from their existing customers Increasing the affinity of the customers for their brand The moot point to note here is that the focus is not on making profits or figuring out which products to sell to the customers so that more margins can be made. The fundamental philosophy here is to give customers more of what they want and need, based on their past buying behaviour and rewarding them through benefits, gaining lifetime loyalty of customers. As a result, customers buy one more product one more time and this drives revenue and profit margins. 11

Very primitive targeting algorithms which completely ignore the buying behaviour of customers.
The key to rewards that you offer to your customers is relevance. To ensure that your rewards are relevant and well targeted one needs to understand the customers shopping behaviour and preferences. The best way to do it is to analyze the data from the Loyalty Program and build models that will target the right customers with the most relevant offers. Another important aspect of a loyalty approach that retailers need to keep in mind is that they need to focus most of their attention on the customers who matter the most to them, the ones who visit often and also spend a decent amount of money. This means that when you create a contact strategy, develop contact 12

Outlook Sep, 2011 | Customer Centricity

Chapter 5

Promotions Strategy

There is a strong belief that promoting products on deals/discounts leads to increased sales. This is true when you look at the short term benefits of such an exercise. What is not evident and something which marketing managers overlook is the long term perils of such an exercise: Slashing prices and announcing sales & discounts to all and sundry leads to reduced brand value. The record levels of non-targeted promotions in the last few years have left brands in the position that customers have gotten trained to cherry pick and seek deals. The custom response to promotions is that of a switching behaviour, from one brand to another, from one week to another which doesnt lead to long term affinity for the brands. On the other hand, if a well planned promotions strategy is worked out with the long term vision of driving customer loyalty it can prove to be a very strong value proposition. The fundamental principle of a good promotions strategy is to engage the customers and generate incremental sales. Incremental sales mean that people, who buy into the brand, buy more of it. During the course of the promotion, if you get customers who are new to your brand, are a bonus, and they need to be taken on the same journey to become a part of the group of your loyal customers. Again, at the core of this strategy, is the customer. Successful promotions should have both a good reach (number of customers who are exposed to it) and range (has the right mix of products that are relevant to different customers). Some of the most popular promotion vehicles for a Retailer are Leaflets/Inserts/Features is a promotion vehicle outside the store. Point of Sale displays Tags/callouts/banners inside the store which announce the promotion. Price Promotions Price discounting or BOGOF (Buy one get one free offers). Coupons through loyalty mailing or otherwise. Gift with purchase customer gets something in addition to the main purchase. Different channels and mechanics of promotions should be used and a thorough analysis of which channels/kinds of promotions work better for which products should be done on a continuous basis to

refine the next promotional activity. The mistake marketing managers make, is that they do not carry the learning from each promotional activity- either successful or unsuccessful into their next promotion. A promotional activity is seen as a short term tactical measure rather than a long term strategic effort. If you want to win with your customers through promotions, it is imperative to create a long term framework.

The fundamental principle of a good promotions strategy is to engage the customers and generate incremental sales.

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Outlook Sep, 2011 | Customer Centricity

Chapter 6

Pricing Strategy
The misconception about pricing is that reducing costs attracts customers to your stores. The reason for this misconception is that Retailers tend to think that all customers are alike. A careful analysis of customer buying behaviour has shown that there are different segments of customers that respond differently to changes in price. Price is about perception and hence it is important for Retailers to understand and identify which products are bought by customers who are price sensitive and have a different pricing strategy for these products - you would typically price these products low. At the other extreme of price sensitive customers, you will find a segment that is affluent and they are more interested in attributes like range, choice, customer service, store ambience and most importantly the quality of the products. The trick is to identify which products appeal to this affluent segment of customers and that can be done by a careful statistical analysis of the data on their purchase behaviour. Retailers can actually increase or maintain the price of these products. Typically the affluent segment customers are high spenders.
Affluent Customers Customer Service Store Ambience Variety & Quality of goods Value Location Low Price Value for money Customers Price Sensitive Customers

One would then surmise that the affluent segments are the most profitable for a Retailer, but that is not the case. Analysis of customer data has shown that price sensitive customers are as profitable as affluent customers as they purchase heavily from private label brands which have high margins. They also buy National brands but mostly when they are on promotion. The key therefore to a successful long term pricing strategy is to understand the price perception of

A careful analysis of customer buying behaviour has shown that there are different segments of customers that respond differently to changes in price.
16

products from a customer purchasing behaviour perspective rather than gut feel and then tailor the pricing strategy accordingly. Smart Retailers therefore should adopt a long term pricing strategy, instead of simply giving a knee jerk reaction to competitor pricing or trying to increase the margins. Setting prices based on short term measures confuses customers. Introducing price ranges for your Private Label brands to clearly demarcate the value brands from the more expensive brands is another successful approach adopted by many retailers to settle the confusion regarding price. Collaboration of the Retailer with the suppliers is also crucial for creating price perception about the National brands so that the messaging is spot on. Unlike in the times of Oscar Wilde, customers nowadays know the price of everything as well as the value of everything. Dont take them for a ride!

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Outlook Sep, 2011 | Customer Centricity

Customer Centricity Check

Have a look at the check box below and see how you fare on your customer centricity journey as far as your Retail Organization is concerned.
Questions Would you send mailers to everyone who shops in your top 10 stores as compared to your top 100k customers Would you focus on growth of your market share as compared to the growth of the share of wallet of your existing customers ? Would you carry out a mass media campaign as compared to a targeted and relevant campaign to a smaller group of loyal customers ? Would you be focused on beating the competition as compared to focusing on winning with your loyal customers ? Would you try and beat your competitor on price for key products as compared to adopting a low price strategy for items that are bought by price sensitive customers ? Would you de-list low margin products from the product line to accommodate new products, even though they are bought by a number of loyal customers ? At the end of a sales promotion would you be concerned only with the sales uplift as compared to understanding its penetration with your different shopper segments ? Y/N

Chapter 7

If you have scored a high number of Yess in the above questionnaire, dont be too glad. The chances are that you need help in making your organization customer centric and you are losing out on a golden opportunity to drive more sales. Snehamoy Mukherjee Associate Vice President, Analytics, Technopak Advisors 17 18

About Technopak
Indias leading management consulting firm with more than 20 years of experience in working with organizations across consumer goods and services. Founded on the principle of concept to commissioning, we partner our clients to identify their maximum-value opportunities, provide solutions to their key challenges and help them create a robust and high growth business models. We have the ability to be the strategic advisors with customized solution during the ideation phase, implementation guide through start-up and a trusted advisor overall. Drawing from the extensive experience of 150+ professionals, Technopak focuses on six major divisions, which are Fashion & Textile, Retail & Consumer Goods, Healthcare, Education, Food & Agriculture and Leisure & Tourism.

Our key services are:

Business Strategy. Assistance in developing value creating strategies based on consumer insights, competition mapping, international benchmarking and client capabilities. Start-Up Assistance. : Leveraging operations and industry expertise to commission the concept on turnkey basis. Performance Enhancement. Operations, industry & management of change expertise to enhance the performance and value of client operations and businesses. Capital Advisory. Supporting business strategy and execution with comprehensive capital advisory in our industries of focus. Consumer Insights. Holistic consumer & shopper understanding applied to offer implementable business solutions.

For further dialogue, please contact: Sr. Vice President, Retail saloni.nangia@technopak.com T: +91 98185 98626 Associate Vice President, Analytics snehamoy.mukherjee@technopak.com T: +91 99581 96952

Saloni Nangia

Snehamoy Mukherjee

www.technopak.com

Technopak Advisors Pvt. Ltd.

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