While the present is rosy, the future might not be as positive if retailers do not act soon enough. Before we get blown away by the current statistics, it makes sense to be cautious about where the market is today and what needs to be done to truly achieve these predicted rates of growth.
The need for Business Intelligence
The situation in the online retail space today is somewhat similar to the dot com boom of the late 90s. There are a whole bunch of companies selling anything from books and CDs to fashion apparel, paintings and even batteries! Also, for each category of products (whether electronics or fashion) sold, there are quite a few portals to choose from.
While that offers an abundance of choice to the customer, it represents a different set of problems to the retailers. Given that convenience and price are the chief reasons why customers would shop online, there is little, at the moment, to choose between the different retailers.
For, barring a few exceptions like Flipkart whose self-delivery is a unique proposition, everyone else seems to be playing on price through bigger and bigger discounts. The problem with such a cut-throat focus on price is that while discounts bring in customers, it also makes them switch to a competitor. Further, customer acquisition through discounted pricing is costly and thus most online retailers are losing money at the moment.
In the next couple of years, retailers will need to go beyond acquisition and look at profitability and differentiation for long term survival. This implies maximizing revenues, reducing costs and providing a unique customer experience. And, that is where Business Intelligence (used here to refer to Customer Analytics as well) will be useful.
Role of BI in maximizing Revenue
Revenue comes from customers buying more, and more customers buying more than once – in other words, retention and repeat purchase. It is common knowledge that 20% of the most loyal customers provide 80% of the revenues and it is this group of customers that the retailers should hold on to.
Personal information like mail ids, shipping addresses, order details, etc. are already available and tracking customer purchases should be easy. A bit of basic BI can then help retailers identify the most loyal of their customers and focus their marketing efforts on these.
The marketing itself, apart from being targeted, needs to be relevant. Instead of giving a blanket 20% off on all products, it might be less costly and more effective to give a 25% off on select categories that the customer buys more often. ‘Personalized promotion’ such as this will have an immediate impact on the customer – he will feel valued that his retailer understands his needs and will thus be willing to provide repeat business.
The promotional mailer will then be less of a nuisance in his mailbox and more of a medium of engagement with the retailer. ‘Personalized promotion’ has been very successfully used by retailers like Macy*s and Tesco to engage their customers. There are standard BI techniques that can make marketing targeted and relevant. They work off the data that is already available with the retailer viz. who purchases what, when and how much.
Retailers with bigger marketing budgets might also want to get a holistic view of their customers beyond their immediate shopping behaviour. Standard web analytic tools can help provide insights on the total number of hours that a customer is online in a day, the sites that he visits, the social media platforms that he uses, his usage of mobile internet and mobile apps and other such behavioral information.
With the spread of digital TV, it will become possible to precisely track a customer’s TV viewing behaviour. Additionally, retailers can also understand their customers’ offline behaviour through their credit card spends – given that a bulk of the customers shares their card information with the retailer.
These kind of insights once integrated, will give valuable information on where and how to target customers, both online and offline. With a bit of innovation, it is not difficult to imagine a day when a customer steps into a Croma store to buy his chosen brand of Plasma TV only to receive an SMS from Flipkart that promises a much better price on the same TV together with hassle-free delivery!
Role of BI in minimizing Costs
Apart from being more effective, another consequence of targeted promotions would be a reduction in the costs incurred in running a national campaign. With better knowledge about their customers’ behaviour, retailers can be more judicious in the use of their marketing rupees and better measure advertising RoIs. BI measurement techniques like “Test & Control” will, over time, be far more accurate in estimating the impact of campaigns and help retailers avoid wasteful expenditure.
BI can also help reduce costs through operational efficiency. Understanding customer purchase behaviour will help in better inventory planning and advanced predictive modeling can strike a right balance between inventory pile-up and out-of-stock situations. Product sales information can also be used to negotiate better margins with vendors.
Online retailers currently struggling to balance real estate costs of setting up warehouses against levels of customer satisfaction due to shipping times will also find BI useful. Combining shipping addresses with purchase behaviour can provide precise answers on where to locate warehouses and what products to stock them with. This kind of insight will be especially useful to retailers wanting to establish a national footprint through a hub-and-spoke distribution network.
Investment in BI
The ways that BI can help online retailers achieve their potential is certainly not limited to the ones noted above. There are a wide variety of tools and techniques available. They range from the most basic ‘Business Health-check’ dashboards to highly customized predictive models. While most of them can be run off the data that is already with the retailer, some would need third-party sources.
Finally, depending on the complexity, the level of investment required will also vary. Based on budget and appetite, retailers should prioritize the business problems that they want to address and then look for appropriate BI techniques to answer them. Rightly used, their investment in BI will reap them rich benefits in a market that is bound to get a lot more competitive in the future.