“Faux Clearance”: Do Outlet Store Customers Care?

One of the hottest retail segments right now is the outlet or off-price market.  Nordstrom, Saks and Neiman Marcus are opening more “clearance” stores than full-line stores.  Bloomingdale’s and Lord & Taylor have recently announced plans to open their own off-price formats.  Hundreds of manufacturers’ outlet stores from Ralph Lauren to Coach to Nike can be found throughout the country.

As I have learned in recent conversations with everyone from neighbors to business reporters to industry analysts, very few customers realize that the vast majority of product in most of these stores is NOT manufacturers’ overstocks or unsold merchandise from the full-price retail stores, but is in fact produced specifically for these stores.  I call this “faux clearance.”

Certainly these stores benefit from the impression that the reason you are getting such a great deal is that they had too much merchandise and had to mark it down to move it.   Their promotional material trumpets 30%, 40% (up to 70%!!!!)  off to reinforce that notion, when in fact in most cases that identical product has never been available anywhere at the “manufacturer’s suggested retail” or “compare at” price.  Deceptive? You decide.

With the retail outlet segment exploding–and the dramatic growth of “flash-sales” sites like Gilt and Rue La La–the reality is that the percentage of directly made for the channel product will only continue to rise.

So if you buy my premise that most customers of these store and sites do not understand the origin of the product in these channels–and btw if anyone has seen good data on this send it my way–would knowing actually change their behavior?

My guess is no, and here’s why.   The players that have been really successful in this market–one great example is Nordstrom Rack–understand that the core customer for these formats is a different customer than their full-line stores and have built the business model accordingly.  This is why Nordstrom can build a Rack store across the street or down the way from their full-line store and still thrive.  This is why we decided to accelerate the growth of our Last Call stores at Neiman Marcus and began work on a new concept.

The challenge going forward will be to consistently execute a compelling value proposition–and that means delivering an experience that complements the parent brand without diluting it and reliably offering great value in the product assortment.  This latter factor is not so easy, particularly as the demands of this channel increase dramatically.

But ultimately if these formats offer compelling price value in their assortments and a great customer experience, why should the customer care exactly why the product is being offered for sale?

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Ruthless Experimentation: What Are You Afraid Of?

Part of any remarkable customer growth strategy is what I like to call “ruthless experimentation.”

Old timey, product centric growth strategy was all about the big reveal.  We spend months and months coming up with our bold new marketing plans and then–at this point, please pause dramatically–Ta-Da!–we see if (hope that?) the customer likes it.   If we are wrong, it’s back to the drawing board for Plan B.

Not only is this cycle unacceptably long, it does not reflect the dynamic realities of what it takes to build and sustain a relationship with your best and most promising customers.   Just about any business has the ability to test and learn on a number of fronts: permission-based email, direct mail, Facebook, Twitter, an in-store promotion and more.  So why do I have conversations virtually every day with executives who are still studying their social media strategy, struggling to develop an actionable customer segmentation or waiting to improve their CRM platform before they try more personalized marketing?

It’s simple: they are afraid.  Afraid to admit they don’t really “get” how something works.  Afraid that they may not hit their hoped for response rates.  Afraid a promotion might perform “too well.”  Afraid to pull the trigger on the “good enough” idea rather than the perfect one.

So what’s the riskier move?  Studying and planning until you have lowered your chance of “failure” to close to zero %?  Or sitting on the sidelines while your competition is out there trying stuff, learning, truly listening to customer feedback and evolving to make their value proposition more relevant and remarkable?

Being customer-centric is a dynamic, learning process.  Accept it, walk through your fear.  Experiment ruthlessly.  Be a linchpin.  And make something happen today.*

* see Seth’s Blog for more on this: http://bit.ly/cilzJL

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My Wish for a New Retail Metric: “Comparable Customer Sales”

Every month followers of retail performance await the monthly comparable store sales reports.  If you aren’t familiar with this metric, it’s simply the year over year sales performance of stores open at least a year.  Not a bad metric, but not really all that helpful.

A better metric would be “comparable customer sales.”

Is your company’s sales growth coming mostly from the segment that is the least loyal and only buys when you run a huge promotion?  Or are you doing well with the full-price customer who is most willing to recommend your brand to a friend?  How are you doing acquiring and engaging that younger customer demographic you always tell the analysts you aspire to grow?

Ultimately the only asset that really matters for most companies is the strength of its customer portfolio.  This metric would give a much better indication of just how well your company is growing that asset.  Not performing well with a strategic segment?  Now you have the call to action to delve into the underlying performance driver.

I realize that even if your company had these customer driven metrics you might not be so willing to share them with Wall Street.  But what’s your excuse for not having them for your own internal use?

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New customers? We don’t need no stinkin’ new customers!

If you are a well established business, chances are you are spending too much of your time on new customer acquisition and not enough on engaging, growing, retaining and converting your existing customers into advocates of your brand.

Any robust customer-driven growth strategy is rooted in having actionable customer segments, quantification of the value those segments deliver (and their potential in the future) and tracking of key customer metrics.

Do you know how much value was lost during the past year from high value customer segments that either stopped doing business with you or dramatically decreased their spending?  Do you know why–and if you can reasonably do anything about it?  Are those action plans in motion?

What about customers you recently acquired?  Do you have tangible engagement programs to communicate that you value their business?  Have you designed a diet of relevant, compelling, permission-based interaction with them designed to profitably grow share of wallet?

While established brands often lose sight of the importance of growing and retaining existing customers, I have seen this with relatively new enterprises as well.  I recently worked on an acquisition evaluation of a high growth retailer.   The target company is performing very well overall and during the sale process touted its impressive record of acquiring new customers and the average amount they spend.  Part of our due diligence involved analyzing engagement, growth and retention rates.  We quickly discovered the picture looked a lot less rosy.  In fact, while the overall growth looked impressive, there was a major leaky bucket of customers that spend a lot one year and then spent little or nothing the next.  When probed as to why this might be the case, the target company had no answers, mainly because they never really noticed this was an issue and therefore never had delved into it.   Since ultimately the value of an enterprise is really just the value of its customer portfolio, this tempered our enthusiasm for an aggressive bid.

Clearly, depending on the specific circumstances of a given company, new customer acquisition can be quite important.  And I would never tell a client to completely ignore attracting new customers.  But for many brands the next best thing to do is to focus on serving the customers they already have and being sure you are optimizing their potential.

So the reason you might think you need new customers is because you are not doing a very good job keeping and growing the ones you already have.

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Seducing the “Promiscuous Shopper”

From my experience, every industry has customers that are not loyal to ANY brand.  I call these folks “promiscuous shoppers.”  They have strange seductive powers.   They look so appealing–and what’s more, when you show them a lot of attention, they are attracted to you, showering your brand with their business.

In many cases, these customers haven’t found the right fit.  Occasionally, it’s an awareness issue.  That is, “Mr. Right Brand” is out there somewhere, but they just haven’t discovered him yet.  In other instances, the customer is well aware of her choices,  but no one brand has yet convinced her that they deliver a value proposition worthy of her loyalty.  But there is also the reality that some customers just don’t want to settle down.  They are incapable of being loyal and they go from brand to brand, chasing whoever gives them the best deal.  This latter situation is the most vexing for many brands and the place where a lot of time and money is wasted.

Think of your own behavior.  If you are anything like me, you have brands that get a significant share of your wallet because your needs and wants are met in a highly relevant, unique–and sometimes remarkable–way.  Then there are other brands that get your business because they meet your wants and needs in an acceptable manner AND because they buy your business (free shipping! double rewards miles!).

So given that every industry has some percentage of promiscuous shoppers what’s the marketer to do?

First and foremost you need to understand what percentage of your revenue and profits (don’t forget the profit part!) comes from these retail harlots.  Ideally you would have detailed consumer research to help you nail this, but you can get a good estimate by noticing what percentage of your revenue comes only when you run a really hot deal.   If you are finding that unless you run an aggressive promotion you have a hard time driving the top line, and that the same customers buy on deal over and over again (I’m looking at you Macy’s!), it’s time to get worried–and to get to work on your customer strategy.

Second, among the customers whose behavior is highly activated by these promotions, what percentage have the potential to be loyal, profitable customers?  Next, what levers (beyond price discounting) can be pulled to engage them further and grow them into loyal, profitable customers?  This level of customer insight likely requires some primary consumer research, but the ROI can be enormous.

We all recognize that aggressive promotions are often necessary to acquire new customers, drive deeper levels of customer engagement or simply to turn inventory into cash.  But if this is done without a clear, well thought out customer growth strategy, the potential to get stuck with a significant percentage of your customer base that is fundamentally profit proof is high.

The bottom line is this: not all “promiscuous shoppers” are worth seducing.   Your job is to stop spending time and money on those without the potential to be loyal, profitable customers and start spending the time on those that do.  Easier said than done, but well worth the effort.

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What? So What? Now What?: Addressing the “Knowing Doing Gap”

In their excellent 200o book The Knowing Doing Gap (http://hbswk.hbs.edu/archive/1111.html), Jeff Pfeffer and Bob Sutton illustrate that there is often a big gap between knowledge of something and translating that knowledge into action.  Tell me about it.

Earlier this week, as I participated in the 2010 American Express Luxury Summit, I was struck by how often speakers referenced data and findings as if this were new knowledge.  For example, a couple of speakers mentioned in one way or another that multichannel customers are more valuable than single channel customers, and then went on to suggest that having an integrated marketing strategy might be a pretty darn good idea.

Now I can tell you from that when I was leading the multi-channel integration initiative at Sears in 2000 (yes 10 years ago!) we had quickly figured that out.  And it was around the same time that one of our key competitors (JC Penney) was referencing this fact for themselves.  When I joined Neiman Marcus as the head of strategy and multichannel marketing in 2004 we were already sharing the “multichannel customers are our best customers” story with analysts.  So in the case of both Sears and Neiman Marcus you might wonder what specific, material strategies did we had in place to leverage this knowledge in a compelling way?  The answer:  none.  Both Sears and Neiman Marcus continued to pursue their businesses fundamentally in a channel centric, rather than customer-centric way for many years beyond learning these important findings.  That are many, often complicated, reasons for why this was the case.  But lack of knowledge isn’t one of them.

Many companies are eager to develop deep customer insight so they can improve their business model.  This is a good thing.  But before you embark on a potentially costly and time consuming journey to gather new knowledge, I suggest you first look at those things you already know (or have a really strong hypothesis on).

Then ask yourself: So what?

Then ask yourself: Now what?

If it’s important enough to the core of what your business is about, then it is essential to drive to resolution.  And if your company just isn’t the kind of company that can take action on something clearly that important, then it’s time to get a new gig.

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Market Share Growth: Get in the Car and Drive

Market share growth is a long-term key to success. As growth becomes harder to come by, growing share of wallet is going to be answer for many companies. Having a compelling customer strategy is critical. Companies that don’t have one need to get one ASAP. Companies that have one need to press their advantage.

Most retail, consumer and luxury brands are starting to report positive sales and profit margin growth.  This is good news, but let’s face it,  the sales growth is against terrible numbers last year and the margin growth is through tight inventories and aggressive cost reductions.  And with easy comparisons until October, the news is likely to look pretty good for the next two quarters.

Unless the economic outlook improves dramatically, for most companies it will become clear that they are not getting back to pre-recession levels of business any time soon.  Going forward, growth is likely to remain muted and margin rate improvements are going to be tougher to come by.  So the real question is what are companies doing to drive market share growth?  For many companies that reduces down to this: what are they doing to drive share of customer growth?

When it comes to taking action on share of customer growth there are only two types of companies.  The first is the company that may have a corporate strategy (often exemplified by big binders of strategic and long-range financial plans sitting on shelves), but does not have a customer strategy. That is, they don’t have deep consumer insight, they haven’t developed actionable customer segmentation, they don’t have segment specific marketing plans, they don’t have truly useful customer value metrics and they aren’t part of the conversation age.  For these types of companies they need to commit to developing a customer strategy and they need to move with great focus and commitment.  Now.

The other type of company has a reasonably well articulated, pragmatic customer strategy (or they are close enough that they can realistically move into action).  With business improving and many competitors still trying to figure out what to do, these players have a once in a generation opportunity to press their advantage, whether that is through opening new stores, creating a compelling multichannel experience, developing a leadership position in location-based marketing or through many, many other possible leverage points.

The answer for both is the same: Get in the car and drive!

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