Articles - Written by Arthur Hughes - 1 Comment
Organizing for Customers Focus
This is the story of how a major retailer, Sears Canada, Inc., changed their organizational focus from a channel to a customer focus. It is an intriguing story.
Many marketers accept the idea that their companies should shift from a product or channel focus to a customer centric focus. But most of them don’t know how their company can go about making the change. Why do they want to shift? To attract and retain the right kind of customers. There is a list of statements concerning customers that most marketers have recently begun to recognize as being true. They are:
- Eighty percent (or some very large percentage) of company revenue or profits comes from the top twenty percent of the customers.
- The bottom twenty percent of customers are usually unprofitable. In some companies the losses from this bottom group are very substantial.
- Long term customers have higher retention rates, higher spending rates, higher referral rates, and are less expensive to serve than new customers.
- Marketing dollars spent on up selling, cross selling or retention building programs focused on existing customers produce more revenue than the same dollars spent on new customer acquisition.
- A five percent increase in the retention rate will produce a very significant increase in company profits.
- The more different products or categories that a customer buys from your firm greatly increases the likelihood that the customer will become loyal, long term, and profitable.
These beliefs underlie customer relationship management: the idea that marketing activities should be focused on increasing customer lifetime value. To achieve LTV increase, the company has to recognize customer segments, and develop customer segment managers who develop customer-focused programs based on these beliefs. Yet, most corporations are not organized in this way. Their compensation systems work to frustrate customer relationship building activities. Look at the typical bank organization:
In a typical bank, there are vice presidents for each major product: credit cards, home equity loans, retail (checking and savings accounts), insurance, etc. The credit card manager receives no bonus or special recognition if some of his credit card customers take sign up for checking account. The Retail Vice President gets no special reward if some of his customers apply for a credit card. Yet any analysis of bank customers will show that the more different bank products that the average customer has, the higher will be that customer’s loyalty to and profits for the bank. The organization and compensation system does not reflect the theory of customer relationship management.
With this background, it is very rewarding to see how Sears Canada dealt with this organizational problem, and solved it head on. The story was explained in a fascinating talk to the National Center for Database Marketing in Orlando last December by Bruce Clarkson, General Manager of Relationship Marketing for Sears Canada. Sears is the largest general retailer in Canada with sales of $4.6 billion in 1997. In 1997 they had 110 full line retail stores. 8 whole home furniture stores, 8 outlet clearance stores. 79 dealer stores and 2,000 catalog agents. They continue to expand. Their big book catalog reaches 5 million households in Canada every year. Two thirds of all sales in both catalog and retail are done on the Sears Credit Card.
A few years ago, Sears made a major investment in database marketing, creating a state of the art marketing database which gave them a new insight into their customer base. A key benefit from the database was to put all customer sales – particularly those from the catalog operation, and the retail stores — into the same customer record. It was an eye opener.
At the time the database was built, there was an SVP for retail stores and an SVP for catalog operations. These two channels competed with each other openly. Their rivalry went back a long ways in Canada. In early Canadian retailing history, the Sears Canada pioneers were the catalogers. They built a strong base in rural Canada. Once this base was established, Sears would open retail stores, based on the growth of the catalog. To the company it was profitable. But to the catalogers, it created a sense of perceived cannibalization. The catalog merchants who had previously owned these markets saw sales attrition due to the stores. They saw it as channel competition. Over the years, the competition became quite heated.
The competition reflected where the catalog operation was located in the typical Sears retail store. In Canada, as well as in the United States, Sears stores put the catalog office way back in the store, where you have to walk through the whole store to get there. It was viewed as an overhead to the selling operation, taking up valuable space that should be used for merchandise. The catalog desk was put as far as possible from the entrance to the store to generate store traffic. Customers coming in to pick up a catalog item, would have to walk past aisle after aisle of merchandise. It was not designed for customer convenience – just the opposite, in fact.
Once the database was built, Sears was able to measure the performance of catalog customers vs. retail customers. The data was very revealing. In 1997, for example, the average catalog customer spent $492 dollars per year. The average retail customer spent $1,102 dollars per year.
What about customers who were shopping both channels? These customers bought more than the average in both channels. When Bruce looked at these cross shoppers, the average cross shopping customer spent $584 on catalog items and $1,299 in retail stores. Leaving these cross shoppers out of the total figures, the customers who only shopped one channel spent $409 on catalog items, or spent $994 in retail stores. Cross shoppers were spending $1,883 per year with Sears, compared to half that or less spent by single channel shoppers.
The facts were staggering. The marketing staff provided their findings to top management. Management could clearly see that the way the business was being managed was inconsistent with customer behavior. The leadership said things like, “I knew it, but we did not have the numbers to prove it!” “We have to do something to encourage cross channel shopping.”
Once top management saw what was happening, Sears began to make major changes. No longer were Catalog and Retail each under a competing SVP. Instead, Sears Canada now has three major divisions:
- EVP for Marketing
- EVP for Sales and Service
- EVP for Merchandising
Each EVP works across all channels: Retail, catalog and several other channels including the credit card, long distance services, gift registries, etc. Marketing does branding, advertising, TV, preprint, catalog production, in-store marketing, the look and feel of the store, the arrangement of the store, customer relationship marketing and e-commerce. Sales and Service delivers service excellence through all the channels.
One of the first fruits of the reorganization was the change in the location of the catalog desk in the retail stores. Stores have started to look contemporary: bright, functional and convenient. The catalog desks are put at the most used entrance of the store. Throughout the retail store, Sears now has outposts where they put copies of the catalog. At each outpost, there are telephones for immediate access to the call centers. The catalog is positioned as an extension to the retail store. Selected catalog pages are displayed throughout the store, so if you are in the footwear division, you will find catalog pages laminated in the footwear department. If you can’t find the size or style you want, you can pick up a phone and order it. It is not promoted as being a catalog order. It is just another way of shopping at Sears.
To promote telephone shopping, Sears now has 48 hour national service on most orders. No matter where you are in Canada, they can arrange delivery for you to a convenient location near your home within 48 hours. Plus, they don’t charge any shipping or handling. With 2,000 locations throughout Canada, goods can be shipped free to nearby locations. The whole idea is to increase the number of cross shoppers, who they now know to be Sears most valuable customers.
What was the result of this? Before Sears provided the catalog and telephone service in the store, clerks would say, if they did not have what the customer wanted, “Gosh I am sorry. Maybe they have it at so and so down the mall.” With the new system, Sears in 1998 saved sales that were equivalent to adding another mid sized store to their 110 store chain with no bricks and mortar – essentially at almost no cost. That virtual store may become the largest single store in the Sears Canada chain.
Sears recently began including a teleshopping icon in their flyers and preprint programs. You can call to obtain by phone any product that is available in the stores. It looks like retail, but it acts like direct. The customer does not know that they are ordering from a catalog. They think that they are calling a retail store with the teleshopping number. Sears customers are capitalizing on the convenience of the system. People call the number and then pick up their products at the retail store. In teleshopping Sears has had double digit growth in its first 15 months. The incremental sales from Teleshopping are equivalent to putting out a new catalog and sending it to 5 million households. The cost, however, has been virtually nil. This is what comes through organizational integration of catalog and retail.
But the database and the reorganization have not stopped at integrating catalogs with retail. Marketing is now moving towards the goals of retention, acquisition and purchase stimulation. Clarkson developed customer attrition models. His first effort was to find out why people were not shopping through the catalog any more. What he discovered was that the strongest predictive variable for not shopping the catalog was exposure to bad service: out of stock, or merchandise that was not satisfactory. Sears could prove that money spent on improved service would increase customer retention. The EVP for Sales and Service now measures his performance based on a customer loyalty index which is now well known throughout the organization.
Clarkson’s staff has created two measures of customers: behavioral segments and RFM cells. They have developed 14 active customer segments and two lapsed customer segments:
- One segment is the Super Spenders. This group has the highest retail transaction dollars, the highest total revenue overall and the highest revenue in five out of twelve merchandise categories. Their credit limit is very high. They are nuts about using the Sears card. In terms of demographics, they own, not rent their homes. They tend to live in affluent suburbs. These Super Spenders are only 2% of the customer base.
- At the bottom are the Occasional Store Shoppers. They are the highest in terms of returns, and highest in payment to the credit balance. They pay off their account every month. They are the lowest in terms of overall revenue, lowest in catalog purchases. But there is a paradox: the Occasional Store Shoppers are demographically identical to the Super Spenders. They live in the same subdivisions. 28% of them lapse each year. Since they use the Sears card, it means that Sears has constantly to do acquisition programs to keep their card holder membership up. Occasional Store Shoppers account for 17% of the customer base. They absorb a tremendous amount of expense.
Besides creating these segments, Sears maintains an RFM system with 189 cells, tracking recency on a quarter by quarter basis. Clarkson’s analysis showed that each quarter between 20,000 and 30,000 new customers acquire a Sears card, buy once, and never buy again. Sears spent a lot of money trying to get the card into people’s hands, but was not doing enough to get them to use the card. Knowledge of this situation has prompted marketing efforts to shift the focus from acquisition to greater use of the card. The RFM analysis also showed that 14% of Sears customers were $2,500 plus buyers who have contributed fifty percent of Sears total corporate merchandise revenues over the past five years. These loyal customers don’t just buy the big-ticket items such as major appliances. Instead, they just loyally shop every month. The revenue builds up over time.
Finally, Sears Canada, like everyone else, has started a web site. They discovered something very surprising. 97% of sales volume is from people who have the paper catalog in front of them. With the catalog, of course, they could call the 800 number, talk to a live operator, and order their products. They prefer to use the catalog, look Sears up on the website, and order directly. What are the implications of this amazing 97% number? Perhaps it makes no sense to put tens of thousands of SKU pictures up on a website. A paper catalog is much more convenient. In a catalog you can skip rapidly from dresses to furniture to automotive in one hundredth of the time it would take on the web. But you can order faster on the web than you can on the telephone.
Sears has built their database. They used and continue to use their database to understand their customers. Then they took that crucial step to change their organization to make use of what they had learned. They have become customer focused. It is a tremendous lesson for the rest of us. Arthur Middleton Hughes is Vice President of The Database Marketing Institute that does research and consulting for e-mail and database marketing companies. He would love to hear about your problems. Perhaps he could help. He can be reached at Arthur.firstname.lastname@example.org or 954 767 4558. His new book Strategic Database Marketing 4th Edition is due out from McGraw-Hill in 2011.
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