Multichannel merchants today face two fundamental challenges: Customer loyalty is declining, and competition is increasing. While these are forces that all businesses grapple with, they pose a particular hazard to direct merchants.
Successful direct businesses have learned the importance of “doing more of what works.” The business is a constant cycle of leveraging active customers, building on successful products and spreads, and shedding customers and products with low response rates.
Breaking that cycle periodically, however, is vital in a business that is sensitive to changes in consumer preferences. And the careful test-and-learn approach that has helped so many direct businesses grow in the past does not always capture changes in preferences rapidly enough to drive significant growth in today’s rapid-fire marketplace.
If you fail to keep pace with the changes in your market, competitors will chip away at your customer base. And you have far more competitors now than you did, say, 10 years ago: Customers today enjoy an enormous array of options for discovering new and compelling products and services, especially as traditional brick-and-mortar players become real direct competitors through an expanded Internet presence. At the same time, you may be missing opportunities to look beyond incremental gains and connect with substantially new, profitable customer segments and extend into new products and categories.
For those reasons, you must step back and understand your own strengths compared with those of your competitors. It is critical to understand why existing customers give share to a competitor and why noncustomers choose that competitor. It’s also vital to uncover market niches that aren’t being filled and see how they might mesh with your brand and business.
Simply put, if you don’t have a plan to renew, focus, and stay fresh, your business will hit a growth roadblock.
A MATTER OF TIME
In the current marketplace, you cannot expect any retail concept to sustain itself for longer than five to seven years, if that long. In fact, we’ve found that the right frequency for business renewal is every three to five years.
While renewing customer and product focus is vital to the long-term success of your business, it’s also a complex undertaking that involves research, testing, and time. Before deciding to undertake the process, chief marketing officers or other top company executives should ask themselves three basic questions about their business:
Are you growing faster than competitors in your market?
Are there products or services you are missing that your competitors are delivering and that your customers might want from you? Are there customer segments that your competitors are serving but you’re not?
Can all the employees of your company describe your target customers well, and do they understand how best to serve them?
Answering “no” to the first or third question or “yes” to the second question indicates that it might be time to consider reviewing and renewing the focus of your business.
The good news is that as a direct business you are in an excellent position to undertake effective renewal. You most likely have a wealth of behavioral data about your customers. This is a marked contrast to most brick-and-mortar retailers, which struggle to collect similar data. Direct marketers are also extremely comfortable learning from behavioral data and can generally implement changes in direction and operations more quickly than most brick-and-mortar businesses.
The real beauty of behavioral data is that they give you the facts about what people do, rather than trying to interpret those facts from what people say they do. Experienced marketing executives know that people often tell you what they think you want to hear, or they mask their true motivations for a purchase or a behavior with what they perceive as reasons more “noble” than the truth. In many cases, consumers just cannot explain themselves — a case where actions truly speak louder than words.
Relying on behavioral data alone, however, will not provide the complete picture needed for business renewal. The nature of direct marketing — constantly refining offerings through behavioral data to get a better response rate — is that you become more and more specialized. You develop a narrow focus that prevents you from seeing the proverbial forest for the trees.
Primary research flavors the stew of behavioral data. Though conducting and analyzing it can be challenging, primary research adds three important elements to behavioral data. For starters, it is great at identifying unmet needs and therefore can help uncover opportunities that are difficult to see when you simply look at what people do. What’s more, primary research can uncover the emotions driving consumer behavior, making it possible to craft a customer connection that goes beyond functional benefits. And primary research can help as you check that the sum of the parts really adds up to a coherent whole.
ONE, TWO, THREE…GO
In working with direct marketers across many categories, we have developed a systematic approach to business renewal. While every company has its own unique challenges and market realities that affect the process, we find that following these steps will unlock a company’s hidden growth potential:
- Immerse yourself in behavioral data
Look carefully at the products, styles, and price/quality combinations you offer, and assess them honestly. Which are working? Which aren’t? Then look at yourself in the competitive space — in performance, in product mix, and in pricing. Can you identify product adjacencies that might provide good opportunities for you based on your current customer mix?
- Add a layer of primary research
Start by gaining a better understanding of the customer segments that form the current core of the business. Identify new products, services, or approaches that could make them a more potent source of growth. In most categories, direct players seldom capture more than 20%-30% of a customer’s spend, so there’s plenty of potential.
Just as important: Understand underserved customer segments and the competitors that serve them well today. Identify attractive opportunities to deliver products and services that meet their needs, either within your core categories or in adjacent ones that fit with your brand.
Research can also uncover how consumers perceive your brand, identifying strengths to protect and build on, as well as weaknesses to shore up.
- Craft a transition plan
The most important part of the business renewal process is building a transition plan to move you from your current customers, products, and channels to the new opportunities you have identified without taking on undue risk. This is an area where an otherwise sound strategy can fail. Here’s where it’s important to adhere to a test-and-learn method.
No matter how attractive new opportunities seem to be, remember that business renewal doesn’t mean wholesale customer replacement. The key is to implement the new strategy while maintaining the loyalty (and spend) of current customers.
The best way to get this done is to lay out guardrails for each area of the organization to protect core products and customers. Make sure to bring the complete organization along on the ride — and to add the appropriate talent to the mix from the beginning. In other words, empower your organization to help protect the core of your business while providing enough specifics to capture new growth.
It may take months for a company to work through the process of renewal, even before launching the transition. That may appear to be a costly investment — one that’s tough to justify in a marketplace with so much competition and pressure on the bottom line. But that’s exactly why you need to budget for this type of regular investment. Inevitably a multichannel merchant that doesn’t review and renew will hit the limits of its formula for success and profitability and will face an imposing barrier to growth. It’s never too early to start renewing your business.
Tamara Charm is a customer insights expert and Bart Sichel is a principal at McKinsey & Co., the international management and marketing consultancy. They are both consultants in the marketing and sales practice in the New York office.