What Heinz Discovered

Retail merchandising strategy is almost completely governed by the principle of price elasticity.  It follows that if price of a product is increased overall units sold drop and vice versa.  But this is not always the case.  Heinz discovered by increasing the size of ketchup bottles from 24oz to 36oz sales increased with no reduction in buying frequency.  Turns out consumption of ketchup follows its own convention.  Mothers buy ketchup for kids so when there’s less than 3/4th left they ask their kids to go slow and consumption rate falls.  With the 36oz bottle 3/4th is still a lot.  When consumption was viewed side by side it was discovered they got over at approximately the same time.  The replacement of 24oz with 36oz helped Heinz increase ketchup sales 13%.  Kaching.

Related article: Price Elasticity Parabola

 

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Not Either Or

Every time the cash register rings two kinds of analysis are possible. The traditional way is to look at the transaction itself (size, frequency, category etc). The alternative is to measure everything leading up to the purchase; things like, other products considered, time taken to make purchase decision, customer history etc. Retailers should look at both.

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Offline Vs. Online

My previous post about bluenile.com has gotten me thinking. The fact that an online retailer (with 0 offline stores) is able to generate 5 times the online revenue of its closest rival (which happens to have 2,700 offline locations) should be a lesson to retailers who believe selling online is hard because browsers can do a Google searches to find cheaper alternatives. Maybe it’s just me but when I find the right product I don’t try any harder to find price alternatives online than what I would in a retail store. If that were the case I’d have set walmart.com as my homepage. The truth is that online customers are no different from their offline brethren.

The other fact that retailers often forget is that brand loyalty is not something that only benefits them; it also benefits discerning customers because it allows then to build a trusted network of sources for products and services. To assume the same customer would be loyal offline but not online is flat out wrong.

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The Cardinal Rule

Compelling online experiences (not traffic) drive sales. Consider a company like BlueNile.com which is able to generate annualized web revenues of $169 Million through just 739,000 online monthly visitors. Translation: every customer that walks into bluenile.com (with or without an intention to buy) ends up spending $19 dollars (and change) at the store. That’s a really big deal and I believe it is heavily influenced by BlueNile’s ability to create a truly compelling and differentiated online experience. Instead of throwing money at just bringing people to their site BlueNile has chosen (quite wisely) to focus on making sure that those in their store end up buying.

Update: Since I wrote this post I received serious flack for my elders. They attribute this $19/visit to the expensive items at bluenile.com. I disagree. This figure was derived by a numerator (revenue) and a denominator (buyers). Because wedding rings are a high consideration item it follows people look around quite a bit. This inflates the number ‘just browsing’ visits (denominator) to bluenile.com thus effectively canceling the effect of the numerator. Comments? opinions? please share.

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Valentines Day Scam

Retailers pay a lot of attention to store walk-ins; in fact they can rightfully claim to be experts. But they don’t know diddly squat about customer service. An example. Through I steer clear of the Valentines Day scam this year I decided to get something from RedEnvelope. Click click and I was at the shipping options page (this was turning out to be easier than I thought). The system presented 3 options, slow shipping, quick shipping and delivery on Valentines Day. I clicked option 3. Obviously. Imagine my shock when last night (on the 13th) I get my ‘thank you for the lovely gift’ call. I paid RedEnvelope 90% more (for shipping) to do just one thing and they screwed that up. Why spend 6 bucks on customer acquisition when service is so bad that customers have no incentive to return?

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Personalization

I’m not much of a gift giver but when I do end up gifting I like to make it as personalized as possible. For Valentines Day I bought love ‘fortune cookies’ from redenvelope.com which I thought were very cute. I would have liked it even better if I could have attached a handwritten note with the gift, something to show the gift was beyond the convenience of online shopping. If RedEnvelope presented an option for me to write a note, scan and upload it it would have made the buying experience that much more special.

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The Adoption Game

The common lesson in the new web 2.0 explosion has been that viral ideas trump good ideas almost every single time. Flickr, YouTube, Myspace and Techcrunch have all benefited from this; neither of these were the first to introduce an idea and yet they ended up completely dominating their respective services. So while retailers have been slow to innovate on the web all is not lost. Retailers need to build compelling online experiences that truly differentiate. If they do it right they have a chance to indulge in some serious land grabbing. If they do it wrong they would have permanently locked themselves in the house of pain.

One of the larger furniture retailers made a serious attempt at selling online. They failed and stopped. While on their website I noticed a message from the CEO that explained the discontinuation by blaming it on high costs of processing returns. Yet again, here is a retailer that’s reacting to the symptom. Instead of digging deeper to find the cause of the high returns the company found it easier to just permanently dismantle the project. I mean, what extra incentive does an online shopper have to incessantly return things as compared to someone who shops at the store?

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The Feel Of Fabric

Traditional retailers (across every single product category) have done so poorly compared to their younger online cousins that it’s not even worth discussing.  The domination is so complete many seem to have stopped trying altogether.  But in the retail world ‘real experiences’ still matter and retailers own the ‘real’ part of the equation.  Multichannel retailers with online stores need to look at it as a way to both preserve existing customers and attract new ones.  The objective is to create widgets that play to the retailer’s strengths.  Retailers like Circuit City have features like buy-online-pickup-in-store and and it would be hard for a pure-play online retailer like newegg.com (which is an Internet Retailer top 10 company) to steal a customer accustomed to Circuit City’s innovative widget.  This is how all retailers need to think.

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If You Use Revenue As Sole Measure You Might Be Making A Fatal Mistake

Nordstrom is one of the few retailers that have managed to grow quarter over quarter.  We don’t know what portion of their $7 Billion in revenues comes from online sales but this channel is definitely growing.  I was quite surprised to learn a whopping 3.5 million people visit nordstrom.com every month.  As CEO I’d be just as interested in traffic details as revenue numbers from the site.  One has to look at both measures to get a complete picture.

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