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eBusiness and the Multi-Channel Consumer
THE MULTI-CHANNEL CONSUMER
Empowered by ever-increasing access to information and competing products and services, consumers are redefining the business context of retail. They are comfortable interacting with retailers through a wide variety of channels - stores, catalogs, Web sites, call centers and e-mail today; and interactive TV, cell phones, kiosks and yet-to-be-invented digital devices, tomorrow. While providing greater flexibility, alternate channels are also creating increased complexity for consumers and retailers alike.
In this rapidly changing setting, retailers face the daunting task of improving waning customer satisfaction even as consumer expectations and choices become greater than ever. In particular, the new multi-channel retail environment creates a major customer relationship challenge for retailers: as consumers become increasingly fragmented in the channels they use, it becomes more difficult to have a comprehensive understanding of any given customer's wants and needs. For example, when Mrs. Jones came into her neighborhood store every week to fill her shopping list, it was a straightforward task to "know the customer." But with today's intense marketplace competition, mega-stores, lifestyle diversity and numerous modes of interaction, no one channel or company has a complete view of the customer.
Recent studies demonstrate how pervasive multi-channel shopping has become: According to research sponsored by Shop.org, an industry trade association, 78 percent of online shoppers also buy through a merchant's physical stores, and 45 percent of them also buy using the catalog channel (that is, using phone, mail or fax). Similarly, 23 percent of catalog shoppers also make purchases on the company's Web site. And while only 6 percent of store shoppers also buy online today, that figure is undoubtedly growing (see Figure 2).
More significantly, consumers rely heavily on the Internet as a means of obtaining information about products and retailers, regardless of what channel they ultimately use to buy. Shop.org found that roughly half of catalog shoppers and nearly three-quarters of store shoppers preferred to conduct their pre-purchase research online - even though the vast majority of both groups still viewed offline channels as the primary means of making purchases (see Figure 3).
Multi-channel consumers are also proving to be the most valuable within a retailer's customer base, tending to spend more and be more loyal. The Shop.org study, based on over 48 000 interviews of shoppers in all channels, found compelling evidence of the value of multi-channel shoppers to retailers' bottom line:
- Store shoppers who also buy online from the same retailer spend an average of US $600 more annually in-store than typical store shoppers of that retailer.
- Tri-channel shoppers, who buy from a retailer's store, online and catalog channels, purchase from a retailer's store 70 percent more frequently than the average store customer and 110 percent more frequently from the retailer's catalog.
UNDERSTANDING CHANNEL CONFLICT
Moving online has left many traditional businesses, particularly manufacturers, susceptible to channel conflict: direct competition with and potential damage to existing channels due to the introduction of new channels. The type and magnitude of channel conflict in the electronic marketplace depends on the nature of the industry and the individual company. Companies that don't own or closely control their offline distribution channels risk damaging sometimes decades-old relationships and revenue streams. However, companies that control their own channels risk cannibalizing revenues with online stores, which take customers out of existing channels and decrease the profitability of those older channels.
Each distribution channel has its advantages. For example, catalogs, direct mail and telemarketing can be efficient ways to target specific customer segments. Sales representatives (whether a manufacturer's representative or a retail salesperson) often provide detailed information and personalized, high quality customer service. Nonetheless, aspects of electronic commerce conflict with and can be viewed by other channels as a potential rival for sales and control of the customer relationship (see Figure 4).
CONSUMER EXPECTATIONS IN THE ELECTRONIC MARKETPLACE
Channel conflict has always accompanied the development of new marketing channels, such as the introduction of outlet and discount stores in the 1980s. However, with the advent of the Internet, channel conflicts are intensified by the unique characteristics of the electronic marketplace:
- New Consumer Experience
A redefined 7/24/365 customer experience with complete price transparency and a high level of personalization is becoming standard on the Internet. Existing channels may struggle to meet these new expectations or risk being replaced. - New Competitors
Companies with no physical storefronts are claiming market share from established businesses. Existing players must now compete with Internet companies with lower overhead. - Time "Compression" Technology
Time "Compression" Technology is allowing business processes - from manufacturing to selling - to happen quicker than ever before. Existing players must manage channel conflict quickly or risk losing market position. - "Mass customized" Merchandise
The Internet, coupled with more responsive supply chains, is the foundation for the widespread availability of "mass customized" products over time. For example, apparel retailers may give their customers options to enter their body measurements online and order customized pants. A computer manufacturer can allow customers to configure their computer as they order it.
THE PROS AND CONS OF DISINTERMEDIATION
Firms in a variety of industries have recently established avenues for selling direct (e.g., Nike, Estee Lauder, Mattel, Eastman Kodak, IBM), and still others are seriously evaluating such strategies. As these companies understand, several specific motivations for selling direct to their consumer exist, including:
- Selection & Service
Resellers carry only small assortments of a manufacturer's products. Manufacturers can provide a broader product selection in a better ambiance with higher service in direct outlets - Profits
Direct control of distribution and pricing can lead to higher profit margins - Control
Resellers can use their power to extract various concessions from the manufacturers - Market & Product knowledge
Direct selling allows for more flexibility in experimenting with product attributes - Customer awareness
Closer contact with customers results in direct feedback to service and product quality
By selling directly, companies are often choosing to circumvent their current distributors or retailers, commonly referred to as "intermediaries", in order to improve profits, customer service, and operational efficiencies. Eliminating intermediaries ("disintermediation") can also improve supply chain efficiency, by allowing upstream parties better visibility into market demand. While these arguments have long supported the use of catalog sales and company-owned stores, they are just as relevant when the markets are created via the Internet. Indeed, the explosion in possibility of electronic commerce is what has drawn many manufacturers into the realm of direct sales.
Elimination of intermediaries is not without disadvantage, though. The role of intermediaries is to efficiently create and satisfy demand, through activities that include building brand and product awareness through advertising and customer education, providing market coverage, gathering market information, providing breadth of assortment, processing orders, and customer support. If a manufacturer cannot otherwise attend to these functions efficiently, elimination of intermediaries may cause an erosion of profits, market share, or both. As noted by L.W. Stern in his book "Marketing Channels" "It is an old axiom of marketing that it is possible to eliminate wholesalers (or any middlemen, for that matter) but impossible to eliminate their functions."
Retaining both channels (direct and reseller-intermediated) is a compromise alternative that may enable greater market penetration than using either one alone. However, this establishes the manufacturer as a direct competitor to its reseller partner, potentially leading increased channel conflict when both the manufacturer and distributor/retailer are selling to the same group.
SHIFTING CHANNEL POWERToday, the Internet is both raising and empowering consumer expectations. Online shoppers are flocking to manufacturer websites, thereby tilting the balance of power in the channel. A Forrester Technographics survey of almost 9,000 users who've made an online purchase shows that 80% have visited a manufacturer's site, and their visits aren't limited to one part of the purchase process. They visit throughout the buying cycle and typically do not distinguish between retailers and manufacturers. These shoppers are a new powerful force - empowered consumers who want what they want, when and where they want it, and will circumvent retailers to get it. This segment is seeking:
- Product Information.
A visit to a retail store doesn't give shoppers the detailed product specs that manufacturers can provide. Nearly 80% of online shoppers look for that information on manufacturer sites. With their interest piqued by an ad or a friend's recommendation, 37% click on a manufacturer site for the latest and greatest about new products - Transaction Information/Capabilities.
Consumers don't think retailers have the market cornered on information about prices or where to buy products. Seventy-nine percent of consumers turn to manufacturer sites for product prices, while almost half want to know where they can make a purchase. - Product Help/Support.
Shoppers do not differentiate among retailer or manufacturer sites when seeking help. One-third or more of shoppers go directly to manufacturer sites for help with installation tips, cross-sells, and other support. After getting a sample from clinique.com, more than 60% of shoppers then bought the product in a store.
Manufacturers and retailers must combine efforts to acquire and satisfy empowered consumers by sharing customers, margins, and intangibles like brand. Manufacturer/retailer relationships can take three forms: manufacturer support, collaboration, and seamlessness (see Figure 5).
In the most basic form of channel cooperation (Manufacturer Support), manufacturers will support retailers with product information and collateral. In this model, the retailer still owns the customer relationship and handles all customer-facing activities. Marketing focuses on the retailer's store and retailers earn their traditional margin. Collaboration allows manufacturers to get closer to the customer, exercise control over their brand and capture a greater share of the sales revenue.
In its most advanced form, channel cooperation makes it difficult to tell where the manufacturer leaves off and the retailer takes over. Manufacturers and retailers share complimentary objectives and share the customer. Both are effectively brand custodians and both realize a financial premium from the empowered customer's willingness to pay for seamless service and a pleasing customer experience.
DETERMINING CHANNEL POWER AND COOPERATION LEVELSSeamless cooperation between manufacturers and retailers (sometimes on a common brand) may not be possible or appropriate for a given company or industry. Manufacturers must evaluate the following factors when determining the right level of cooperation or when assessing their channel power:
- Brand Equity
A strong brand drives customers to a manufacturer's site while a weak brand points customers to a retailer - Margins
Higher margins let a manufacturer more easily absorb direct eCommerce costs not already part of its core expertise - Customer Involvement
The larger and less frequent a purchase, the more effort and consideration a customer exerts during the buying process - Retailer Value-Added
The more a retailer contributes to the customer experience, the higher the value-add (e.g., large product assortment, touch-and-feel) - Internet Value-Added
The more the Internet enhances the shopping experience, the higher the value add of selling directly (e.g., product configurators, deep explanatory content) - Current product / service lines and ability to segment
Channel conflict can be mitigated and channel cooperation can be fostered with the ability to sell different products through different channels (e.g., a manufacturer can sell a specific device only on the Internet but accessories for it must be bought in stores) - Current customer base and ability to segment
Channel conflict can be mitigated and channel cooperation can be fostered with the ability to sell to different customer segments through different channels (e.g., a website can be targeted just to price-sensitive customers, while other customers would continue shopping at retail stores) - Competitive Intensity
The level of competition within both the retail and manufacturing segments will also be a factor in channel strategy since it is a key determinant of market power (e.g., the more retailers there are then the stronger the manufacturer's position) - Organizational Capabilities
Internal factors will also shape a channel strategy. Financial position, technological and human resources, organizational structure, fulfillment and marketing capabilities, etc.
As stated before, successfully managing both direct and intermediated channels may enable greater market penetration than using either one alone. Successfully managing these channels can mean greater visibility, greater market and wallet share, more efficient and seamless business processes, and of course greater profitability.
As with many technology-intensive efforts, businesses struggle with multi-channel initiatives often because decisions are made in a vacuum - without sufficient regard to strategic, business process, organizational or technological issues. Companies need to take both a top-down and a bottom-up view and ensure tight linkage between the customer experience, organizational processes and capabilities, and enabling technologies.
- Customer-facing requirements drive the top-down perspective. What types of service outputs do different customers from each channel of interaction demand? What kinds of customer experiences is the company trying to create? What will it take to fulfill the promised consumer value proposition?
- Business-facing considerations drive the bottom-up view. How do we achieve our business and financial goals? How can asset productivity be maximized? What changes are required in the organization? What technology and skill gaps must be filled?
The key for online retailers is to marry the top-down and bottom-up perspectives with equal weight - too many companies focus excessively on internal capabilities and constraints, seeking to optimize their operations rather than add value to the consumer. Addressing the key linkages in a holistic way is a critical success factor in delivering on the promise of IMCR. A comprehensive approach should address the following:
Strategy definition and alignment
Determine what you want to achieve first. How aligned are your business and IT strategies? Agree on the process and criteria you will use to prioritize possible initiatives and make investment decisions. For example, potential integration efforts could be prioritized based on their expected impact to the organization and their difficulty in terms of implementation. Identify measurable results against which you can track progress. Are incentives for employees and managers across different channels and functions aligned? Will they encourage the desired behavior?
Customer and marketplace insights
Ensure that you have an up-to-date understanding of the preferences and profitability of your key customer segments (which is crucial to prioritizing investments). Understand not just what they buy and who they are, but also why they buy. Learning attractive traits of highly profitable customers allows retailers to identify mid-range customers exhibiting high value potential. Market research and segmentation analysis should be conducted on not only your own customer and transaction data but also on the addressable market at large - otherwise, you might overlook the needs of potential customers.
Customer experience optimization
Develop a strong understanding of how customers move through the buying cycle. Where are the existing pain points from customer, employee and business perspectives? Based on the customer insights developed above, take steps to offer the choices and services that your target customers deem important in any given channel. Do they want knowledgeable sales help, or easy self-service? The answer might vary by channel and product category.
Certain companies have managed to utilize the Internet to encourage channel cooperation or strengthen customer relationships. The following case studies demonstrate how companies, by analyzing the fundamental nature of their products, can enhance their customers' purchasing experience and drive up sales. A sound understanding of consumer purchasing behavior through traditional sales channels combined with the benefits of the Internet can produce a powerful value proposition.
FORD MOTOR COMPANY
Using the Internet to enhance retail customer service
Ford Motor Company has successfully launched a program called "Internet Approved". Through this program, Ford's 6,000 dealers throughout the nation are required to participate in extensive Ford Motor Company Internet training and dedicate an Internet Manager resource at their dealership to help customers with web research.
Dealers that have passed Ford's strict standards and achieved "Internet Approved" status aid customers with tasks varying from searching dealership inventories for vehicles and parts to building custom automobiles. Dealers can then maintain relationships with their customers through email and instant messaging, enabling them to aid with customer purchasing decisions remotely. By setting up an Internet infrastructure and training dealers to build custom web pages and using the web as a resource to build customer relationships, Ford has managed to collect and build relationships directly with customers while avoiding a conflict with its highly valued dealer channel. Ford has effectively used its extensive dealership network to push customers to web transacting, allowing Ford to decrease operating costs, better track and forecast inventory and capture customer purchasing data.
Upon requesting the nearest dealers, Ford.com returns back a map, a list of dealers in the area and their personalized dealer websites. The dealers that have achieved "internet approved" status have a special insignia next to their address.
REI
Multi-channel strategy reflects product categories
REI makes outdoor climbing, hiking and mountain biking apparel, operating 57 stores throughout the US and Japan. The products made by REI and competitors require a high degree of touch and trial as well as significant information prior to purchase. REI has exploited these characteristics by building in-store climbing walls as well as hiking boot and mountain bike test areas. To support large inventories with limited floor space, REI has installed web kiosks through which customers research the additional 68,000 items in REI's inventory as well as 45,000 webpages of product information. Thus REI customers can visit REI stores, test products and research the numerous alternative REI products available to them in REI's vast inventory. REI tracks customer information on all purchases made in any channel by its 5.5 million members.
By exploiting the fundamental nature of its products and through the installment of kiosks in its stores, REI has effectively engaged its customers in a multi-channel experience. Kiosk implementation has allowed it to dedicate floor space to test areas while simultaneously attending to its breadth of inventory. Customers can utilize the strength of each channel and have consequently increased their spending. According to Jupiter Communications, existing REI customers who shopped online for the first time increased their store spending by 22% and customers shopping more than one channel spent overall more than in the previous year.
The REI nation-wide directory returns store location information as well as store-sponsored events. Because of the kiosks, REI has additional floor space that is used for customers to test out the REI products.
SUREFIRE
Flexible Technology and Cooperative Channel Strategies equate to success
In 2001, SureFire was a small company primarily focused on selling its flashlights and weapon-mounted technical tactical lights to a specialty market through an established vendor network. With a new eCommerce enabled site brought online in August of that year, Surefire.com almost immediately began seeing 300% year over year revenue growth.
With a repositioned brand and the expansion into an entirely new, higher-margin online consumer market, SureFire was now expanding into new channels. They now had a direct, high-margin retail channel in addition to their core market, and the leveraging power to control their distributors' online selling practices. While they were now technically competing with their distributors, Surefire developed a collaborative strategy that included qualifying the dealers that could sell online, as well as providing a comprehensive affiliate program to qualifying resellers. Thanks to the larger margins associated with the new online retail channel, Surefire has also been able to largely remain non cost-competitive with their existing dealers.
The Surefire.com website provides value-added services for both customers and dealers alike, including a comprehensive affiliate program that rewards dealers and resellers in a collaborative manner.
CONTACTWhether you're looking for significant online revenue, increased traffic and brand recognition, business process streamlining, or all of the above, we can help. Our open source technology and award-winning designers and engineers will give your eBusiness the power of content, commerce, and control, with a best-of-breed solution that will give your customers a reason to come in- and come back.
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