Using Customer Knowledge to Optimize Channel Performance

Nov 27, 2006 9:36 PM  By

Once a retailer has created a centralized customer database and has been measuring multichannel campaigns, they can start analyzing cross-channel customer behavior to ensure that they’re investments in specific channels are delivering maximum value to their customers as well as their business. Most retailers will derive significant value from developing multichannel optimization strategies by using customer insight to drive major investment decisions. When used as the driver, that insight is the impetus for:

• Rationalizing store mix in a trade area
• Identifying profitable locations for new stores
• Improving inventory management and assortment planning
• Adjusting catalog mailing strategies
• Implementing new customer service options on the Web

Multichannel retailing requires new levels of analysis that add channel criteria into the statistical mix. Each channel must be scrutinized on several fronts: which customers prefer which channels, how each channel contributes to the sales process, and what is the return on channel investment. Sales and marketing measurement must be expanded in the form of enterprise-wide, cross-channel response tracking and campaign results analysis tools to include the following gauges of channel performance:

  • Channel preference. Companies must track through which channels customers prefer to buy and research their purchases. While some consumers communicate regularly across several channels, many will choose a primary channel. Knowing this information will help companies determine ongoing contact strategies and channel investments.
  • Channel mix. Multichannel consumers by definition interact across several touch points. Companies must be able to identify which of their customers are truly multichannel consumers. And they must measure how each channel impacts the sales process – which channels facilitate product research, which capture sales, and how does each channel interact with the rest to create a total shopping experience.
  • Channel shift. Consumers tend to move across channels for several reasons: store openings, product category, or mere convenience. Some migrate most of the shopping preference from one channel to another. Creating a differentiated customer experience requires vigilant tracking of these patterns and integration into a company’s contact strategy.
  • Channel ROI. Companies must also measure the profitability of each channel—how much customer demand for each channel nets relative to its respective operating budget.

Cannibalization of the direct channel is one of the biggest challenges and risks for companies who view opening stores as a growth strategy. One method of channel optimization that can provide visibility into the risks of channel shift when opening stores is trade area analysis. Through this type of analysis, companies use multichannel transaction information coupled with a geographic information system to visualize the store network performance to determine the optimal mix and location of stores in a specific area. In many instances, retailers believe that a natural channel shift of 10%-20% occurs when opening stores. But through trade area analysis, we’ve found that each location is different and there are situations where channel shift can be as much as 60%.

While the reasons for this shift to occur vary, by analyzing the concentration of Internet or catalog shoppers in a specific trade area in addition to other location variables, retailers can better forecast the impact that store will have on the other channels sales and develop strategies to mitigate the inevitable channel cannibalization. Ultimately, trade area analysis can assist with making decisions about marketing investments by measuring the impact mailing catalogs or email offers are having on store sales and providing a fact base to change catalog circulation patterns. The value of trade area analysis is the alignment of resources to meet the demands of your customers, maximizing the ROI in both channels and marketing.

Channel optimization is the next logical step in using customer knowledge to improve the customer experience, building loyalty, and profitably increasing revenue. Especially for those catalogers who plan to use retail stores to build their brand and their sales, channel optimization is a critical key to success.

Marc Fanelli is senior vice president, decision sciences, for Schaumburg, IL-based Experian Marketing Services