Should The 80-20 Rule Still Factor Into Your Marketing Strategy?
CMO EXCLUSIVES | September 12, 2013
by Mercedes M. Cardona
QR codes. Augmented reality. Mobile wallets. The rise in omnichannel retail and the development of the technologies that enabled it have done much to reshape the face of retail marketing and merchandising.
- About 80 percent of an average retailer’s sales continue to come from 20 percent of the inventory on display.
- Even with reams of Big Data to draw on, many retailers are still structured in silos that keep marketing and merchandising from cooperating fully.
- Most retail insiders talk about omnichannel retail and have a vision of where they want it to be.
Indeed, the multiple touch points involved in every sale, from word-of-mouth to in-store display, and the growth of sales channels such as mobile, which didn’t exist a decade ago, are changing both how shoppers behave and how merchants can reach and react to them. In turn, all of those channels and touch points are generating masses of intelligence, while technology is offering merchants a variety of ways to slice and dice the data to predict what will sell and how to sell it.
And yet a few retail marketing truisms still remain, in particular: that it is still easier to sell more to an existing customer than it is to win over a new one, a.k.a. the 80-20 rule. In other words, about 80 percent of an average retailer’s sales continue to come from 20 percent of the inventory on display.
“Every business has a small group of highly loyal customers who comprise the majority of that business’ sales. Big data can’t necessarily change that phenomenon, but it can give a marketer a much better understanding of who that valuable minority is, and how to keep and nurture them,” said Paul Guyardo, CMO of DirecTV and Kmart’s former head marketer, in an interview with CMO.com.
Why do these concepts endure in this low-loyalty, data-driven retail environment? Because shoppers’ attitudes, retailers’ operations, and relationships between merchants and suppliers haven’t changed that much, retail experts said. Even with reams of Big Data to draw on, many retailers are still structured in silos that keep marketing and merchandising from cooperating fully. In addition, stores are still getting pushback from shoppers about sharing their personal data–even to personalize offers–and many of the retailers still need to be convinced the technology that would bring marketing and store operations in sync is an investment worth making.
“You’re still seeing a lot of retailers who are still on the journey,” said retail specialist Christina Bieniek, a principal at Deloitte Consulting, which earlier this year published a couple of papers that discussed how advanced analytics could put the right product in the right place at the right time to satisfy customers, and challenged the thinking of retailers regarding the 80-20 rule. “There are a lot of retailers who are getting better in getting to a single version of the truth…You’re just not seeing everyone there yet.”
Robin Lewis, CEO of retail industry publication The Robin Report, echoed that sentiment. “To the retailers, this is all new to them; they’re trying to figure out: ‘How do we use those tools?’ Many of them are testing and experimenting,” she told CMO.com. “We’re in the embryonic stage, and it will take a while for them to sort out the ways to use [tools] for maximum return.”
Big Data Spurs ‘Nice Conversation’
The early stages of leveraging data took place in the 1980s in the back of the store, as retailers applied it to the logistics of getting inventory in warehouses and into the storerooms. But that was the easy part, experts said. Now retailers are bringing data into the front of the store, to shape the sales floor, and it is blurring the edges of concepts such as the 80-20 rule.
“I do think the 80-20 rule still holds–it’s just more complex in how you’re looking at it,” Bieniek told CMO.com. “The number could be slightly lower, of course, but the idea absolutely applies.”
The 80-20 rule also endures for an operational reason: Inventory is still affected by relationships between the merchandisers who stock the shelves and the vendors who supply them. Data can help refine assortments and rebalance inventory among channels, but the ultimate stocking decisions made by merchants are more informed by data than determined by it.
“There’s a dynamic that goes on between the retailer and the manufacturer. The big data can provide some insight into it, but it won’t change the assortment,” said Laura Gurski, partner global head of retail practice at consultants A.T. Kearney, in an interview with CMO.com. “Big data provides some insight into the profitability of that assortment. It should provide a nice conversation between the vendor and the retailer, if they’re using it right.”
The dynamics behind growing sales are also being challenged by new technologies, such as location-based marketing and augmented reality, which can draw in-store traffic with push marketing. For example, Lewis noted how The North Face offers mobile shoppers an app that can ping their phones with special offers if they come within a two-mile radius of a store.
In theory, drawing in those technologically sophisticated customers should result in higher sales. An Adobe survey found that customers who were early adopters of mobile gadgetry and features also tend to spend more at retail. For example, shoppers who said they had used a mobile wallet during the past three months were three times more likely to have bought more than $500 in consumer products through their smartphones during the past year: 31 percent versus 10 percent among those shoppers who didn’t use mobile wallets. And 21 percent of those who used QR codes in the past three months had spent more than $500 via mobile, compared to 11 percent of those who hadn’t.
But the overall rule that upselling to existing customers–regardless of their technological savvy–is more effective than trying to acquire new ones still holds, experts said. Shopper habits are hard to change, even in this environment.
“Stealing a customer away from a competitor is much more costly than getting yours to buy more and more often,” said Lewis, co-author of “The New Rules of Retail.” “Your loyal customer is something like twice as profitable. Those numbers have been around for a while.”
And the same tools that help attract new customers–such as location-based offers–are even more effective when applied to enhancing the loyalty of an existing customer, said experts.
“What’s interesting is the tools and the power of the data we now have to target customers, we can use that same tool set to get better with the customers we have today,” Bieniek said. “As a retailer, I have to be just as good in how I’m communicating with our existing customer…their options are so much better than they used to be years ago. It has created more emphasis on what I am doing to retain my customer base.”
On The CIO’s Agenda
The gathering of big data and applying predictive analytics to it could, in theory, challenge both the 80-20 rule and the balance of power between loyal customers and new ones. But retailers are still struggling with setting a framework to use data effectively, according to experts.
“It’s a wild, wild west with all these tools,” Lewis said. The retailers are still learning how to integrate data tools seamlessly across all the retail disciplines, including IT, marketing, and customer service, he said.
“It’s a bit of a process issue and a skills issue,” Gurski added. Many retailers haven’t yet made a full investment in data, but coming off a tough economy, she is seeing her clients making judicious investments in how to spend on technology. “It is on the CIO agenda,” she said.
But even as the investments come on line, the average retailer is still siloed in ways that prevent good cooperation, experts said.
“I’m siloed across channels, as well as how my marketing and merchandising have worked in the past,” Bieniek said. “I’m having to think in a holistic view of the customer. . .The way my data has resided in years is not making that easy.”
As companies start to build more and more analytics capability, processes have to be re-engineered–and that takes senior-level buy-in, Gurski said.
“It’s one thing to build a beautiful model; it’s another to build a team of people who can take actionable decisions,” she said. Gurski noted she often sees CIOs and IT departments research and acquire solutions to apply data in-store, and then become frustrated when the business teams responsible won’t use them.
“It’s more than the technology dollars, it’s a business process,” she added. “Having the data for data’s sake–forget about it.”
Most retail insiders talk about omnichannel retail and have a vision of where they want it to be, but it’s another story to make that vision operational, overcoming what it will do to the operations model that has existed at every retailer for years, Bieniek said.
“The act of getting there is going to require significant change,” she said.