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Customer-centric merchandising a pipe dream or imminent reality?CUSTOMER-CENTRIC MERCHANDISINGprecimapage 1The next great evolution in retailing“The customer is always right” went the old retail slogan, but for many decades, what the customer wanted or should want was actually determined by merchandise buyers at corporate headquarters, not the shoppers themselves. Todays consumers are much more informed and have higher expectations, requiring retailers to both better understand their needs and then determine what actions should be taken to satisfy those needs better than the competition.A number of retailers are making great strides with customer-centricity in marketing and customer service but merchandising has not made the same headway. Over the years, the buying organization has morphed from buying products and negotiating costs to determining where products should be located in the store and on shelves. This then evolved into category management where the category manager had responsibility for setting prices and planning promotions. A further evolution of category management took place with the incorporation of customer insights into the category management process to assist with determining price and promotion policies. But true customer-centric merchandising doesnt attempt to graft customer insights onto the traditional category management approach. Instead, it completely rethinks the process by allowing customer preferences to guide category management decisions, which in turn facilitates the achievement of sales targets rather than hindering them. Still, skeptics wonder, if traditional category management has served the retail industry well in the past, why is customer-centric merchandising so important? The answer is, in an increasingly cluttered marketplace, the one sure way to stay ahead of the competition is to better and more accurately satisfy the needs of customers. precimapage 2Whats possible, and whats notIn the past, price, promotion and assortment planning was done on a category-by-category basis. But customers dont think about buying individual items from individual categories. They shop across multiple categories with a host of different agendas. In todays increasingly sophisticated market using advanced analytical techniques coupled with powerful, cost-effective computational abilities, retailers can factor in the customer perspective from the earliest stages of the planning process. These customer insights can play an integral role in determining price, promotion and assortment plans. This comprehensive, bottom-up approach ultimately creates price, promotion and assortment plans that best satisfy customer needs while achieving, with confidence, merchandising objectives and targets. In addition, this approach also adds analytical rigor to one of the oldest merchandising strategies: using select items as loss leaders to drive increased store traffic and larger basket sizes. Rich customer-level knowledge is the foundation for integrated customer-centric retailingThese customer insights can play an integral role in determining price, promotion and assortment plans.PriorityCustomersEnterprise Customer Strategy: Prioritize Investments & InnovationTactical Execution: Price, Promotion, AssortmentCustomer Segments & CohortsCustomer-Level Attributes & ScoresCustomer-Specific: One-to-One Marketingprecimapage 3Previously, choosing a few items to drive store traffic required a big leap of faith, since there was no way to prove if the profit dollars lost on the traffic-driving items were outweighed by the increase in profit from other purchases. Customer-centric analytics greatly improve the precision and effectiveness of this tactic. Data-driven customer-centric merchandising does not, however, enable a retailer to change the price of an item on the shelf for each individual customer. While technologically possible, pricing products for individual consumers is rarely desirable for most retailers, due to concerns about being exposed to claims of bias against one demographic over another. Personalized pricing, as it currently exists, works more like traditional coupons. The twist with personalized pricing is that individual items for sale are tagged as being important to certain groups of customers. Then those customers are offered a personalized price on those targeted items, typically through a digital coupon. The discounts are often similar to those on traditional coupons (e.g., $1 off per item), but are usually delivered via email or a smartphone app. As with traditional coupons, the special prices are offered to select groups of customers for select groups of items, but in a much more targeted fashion than was previously possible.Points of entryShort of ripping up the current organizational chart, job descriptions and compensation structures, how can retailers reconfigure their organizations to focus on the customer while still achieving their financial targets? Fortunately, implementing customer-centric merchandising is an evolution rather than a revolution. There are logical and low-risk places to start, and plenty of opportunities to change course along the way. With a well-thought-out plan, retailers can achieve their short-term financial targets while building toward and realizing their customer-centric merchandising objectives. Here are the first 5 steps:Leverage customer-driven insights. Retailers will rarely have sufficient resources to pursue every opportunity that is available. Senior members of the merchandising team need to prioritize where to best allocate those resources. The first task is to determine where the largest opportunities reside, by category, based upon customer needs and buying behavior.Implementing customer-centric merchandising is an evolution rather than a revolution.1precimapage 4Clarify the role that different brands and items play within those categories. Individual category managers can make better-informed decisions about brands and items using the same data and insights that have been used at higher levels of the product hierarchy. This process is not that different from the traditional one, but it is sharpened by access to hard insights generated from actual customer purchase data.Determine how the best customers respond to prices, promotions and assortments. When investing in lower prices and margins, its in the retailers best interest to make those investments in segments where loyal customers will value them most. Similarly, when category managers are making decisions about which brands or items should receive precious promotional space in a weekly circular or on secondary placement displays, they should do so with granular information about which customers are most drawn to those promotions. Translate strategic decisions into actions. Senior executives invest significant resources and time into developing the right strategies for growth. While a customer-centric outlook greatly benefits those strategies, even the best strategies have little value if the day-to-day business decisions do not effectively deploy those strategies. Bridging the gap between higher-level strategies and the lower-level decision-making is crucial to the success of a customer-centric merchandising approach.Customer-Centric Merchandising ApproachHow important are categories to overall business and to your best customers?Retailers need to determine which categories are the most valued by their best customers and also to the overall business.Value to Overall BusinessValue to Best CustomersHIGHOPPORTUNITYBusiness PerformancePRIORITYResource InvestmentsLOW PRIORITYCost EffectivenessPRIORITYLoyaltyHIGHLOW345Identify the most important categories. Dividing a retailers business into quadrants based on the categories that have the greatest value to both its best (and most loyal customers) and the overall business enables senior merchants to assign roles to each category:2precimapage 5The power of dataWhen structuring the best methods for maximizing the impact of price, promotion and assortment resources, customer-generated data serves as an invaluable tool. In each of the following tasks, the metrics derived from such data provide the fuel for optimizing the strategy, serving to enhance the knowledge and experience of key decision makers. Designing customer-centric price plans. Leading retailers have been using advanced econometric models and optimization technologies to set prices for years. But all too often, the customers perspective is not considered, which results in sub-optimal pricing, promotion and assortment decisions. By understanding how different customer segments respond to various merchandising actions, the merchant can make better informed decisions.In the example to the right, if a category manager were only to look at the impact across all customers, he or she might decide to invest in lowering the price of Item A rather than lowering the price of Item B. But most of the volume increase for Item A comes from low-value tertiary customers, while most of the volume increase from lowering the price of Item B comes from more valuable primary and secondary customers. Armed with insights at the segment level, the category manager can make smart decisions about where to invest in lower prices.With customer-centric merchandising, items, brands and categories that drive traffic and basket size automatically receive the lower prices as part of a complete set of optimized customer-centric prices. Long-term loyalty is all about rewarding your best customersAt first glance it would appear that the retailer should go with lowering the price of ITEM A, however ITEM B offers a better choice for long term customer loyalty.All Segments(overall lift)12% 10%Primary Segment0% 12%Secondary Segment 3% 8%Tertiary Segment 20% 2%Sales Volume ChangeItem A Item Bprecimapage 6Designing customer-centric promotion plans. A similar logic applies to designing customer-centric promotion plans. By better understanding how different customers respond to different promotions, its possible to develop promotion plans that satisfy customer needs while also delivering maximum value for the retailer. Provided with information on how different customer segments respond to a particular promotion, a category manager can take the following steps:1. Keep and expand promotions that appeal to the businesss most valuable customers.2. Where possible, fix promotions that are not productive in attracting either the most valuable customers or enhancing the business overall.3. When a promotion cant be fixed, stop running it and reallocate the resources to better-performing promotions.By taking these actions, senior decision-makers and category managers can highlight items and brands that address the needs of valuable customers while achieving shorter-term financial performance targets with greater confidence. Category managers can also pinpoint the appropriate depth of discount needed to attract loyal customers without creating unwanted incentives that encourage unprofitable behavior from customers cherry-picking deals.Category managers are also better prepared to solicit promotions from manufacturers that are more relevant for their customer base, as opposed to simply allowing a manufacturer to push promotions that serve their brands. This puts the category manager in a stronger position when negotiating with manufacturers. Consequently, the category manager can ensure that trade funds are appropriately allocated to the right promotions. Designing customer-centric assortment plans. The traditional method of assortment management involves ranking all items in a category by sales and then cutting the bottom 5 to 10 percent or more. However, this approach falls short for a few different reasons: Some low sales items are important to valuable customers. Cutting these items could lead a valuable customer to look to a competitor for these items. Some of the lower sales items have low transferable sales. If items are cut and no reasonable alternatives are offered, all of the value from the cut items will disappear out the door. Some of the lower sales items may be part of a group of items that are usually purchased together. If you cut these items, then you may lose all the associated sales.Its possible to develop promotion plans that satisfy customer needs while also delivering maximum value for the retailer.precimapage 7 A category-by-category approach may result in making too many cuts in some categories and too few in other categories. Some categories need to provide customers with more alternatives than other categories and, as such, shelf productivity can differ quite significantly between categories. Taking a Chain or Banner-level approach may miss some of the differences that occur at lower levels of the store hierarchy. An item that performs well in a handful of stores in a particular district or region may not sell well in other districts or regions.Todays customer-centric methods offer a lower-risk alternative by taking the guesswork out of which items to cut. Cutting-edge data analytics help prune low-productivity, low-risk items to make room for more productive items. This, in turn, produces better individual category and overall store performance.Spreading the word. Any retailer that starts down the path of customer-centricity must be able to communicate the insights gleaned from customer metrics throughout the organization. Simply providing category managers with the metrics alone is not enough. The metrics must be framed in a relevant context for all the different kinds of managers and decisions in the merchandising organization. The metrics also must be easy to understand and simple to use or else they will simply gather electronic dust in the computer files of merchants.Knowing your customer, today and tomorrowCreating and executing a well-crafted plan for implementing customer-centric merchandising is a key part of the process. Taking a crawl, walk, run approach ensures that the organization retains a focus on achieving short-term financial targets, even as it reconfigures the decision-making mechanism. To remain focused, retailers should prioritize their activities within three distinct stages:Assess the potential benefits Customer-centric merchandising requires a commitment from the complete organization, so its important to outline the opportunities that this relatively new approach creates. The benefits of customer-centric merchandising are many-fold and significant in scope and can be grouped into the following areas:Strategic Putting customer-driven merchandising insights at the fingertips of merchants enables them to make more-informed decisions that are aligned with customer needspetitive Taking a customer-centric approach to merchandising provides a retailer with a sustainable way
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