With reports this week of poor retail sales this Christmas, is it time for the industry to have a rethink? Almost every company I’ve ever worked with uses revenue targets as their KPI. It’s worked for years, so why change? The problem is setting a target and forecast around revenue drives poor behaviour and isn’t actually good for business. The industry should move away from vanity metrics and focus on using data to drive smarter promotions and better customer experiences.
KPIs and targets drive behaviour
Your choice of KPI is crucial. If you choose the wrong KPI as a target, people will change their behaviour, which doesn’t always drive the right decisions to make a profitable business. Call centres which focus on average call-handling times is a great example; clever people try to doctor this metric by hanging up quickly on five callers and taking the sixth as normal. Another example is supermarkets still using voucher redemption rates as their KPI. I recently attended a big data conference in London and a speaker gave this as an example, "If the data tells me you buy the same 500g block of cheese every week, I'm confident that when I send you a voucher for that block of cheese, you’ll use it". I completely agree. But does a discount on cheese change my behaviour, and make me buy something else as well, increasing incremental spend? If I sent a voucher for a more premium block of cheese, would you buy that instead? What’s the likelihood of you switching to that cheese long-term? Which products do you sell that have higher margins, where discounting would be more kind to the bottom line? These questions are hard to answer but by no means impossible.
Forecasting and Targets
Poor KPI choices are not isolated to supermarkets and call centres - the same thing is happening across retail. In my experience, targets are usually set as ‘last year’s revenue +X%’. This ignores so much; what competitors are doing, how the industry as a whole is doing and external factors such as Brexit, for starters. If you’re reading this and you’re thinking “my business is immune to these factors”, then you may as well stop reading now. Focusing on an LY +X% target means that if the discounting you did last year doesn’t have the same cut through, the only lever you have left to pull is deeper discounting. This may drag you to your revenue target, but what impact does it have on margin, and which is more important? This week shares in ASOS dropped 40% in one morning after they released their latest forecasts. Revenue growth was scaled back from 20% to 15% and margin forecast was revised from 4% to 2%. Which of these revised figures do you think impacted the share price the most?
Smarter discounting and better experiences
So if deep discounts and focusing on revenue isn’t the answer, what is? In my opinion, it’s smarter promotions and better customer experiences. First, companies need to understand the impact of deep discounting. What’s the margin for sales? How does it compare to periods when there are no sales? From here it’s easier to see how much you’re spending in discounting and how much you’re making back in profit. Consider investing this money in smarter discounts, improving communications with customers, and improving online experiences. How much would you need to improve your website conversion rate by to make the profit you made from deep discounting? Remember, better conversion rates apply all year round, to non-sale items as well. Discounts still have a role to play, but they need to be smarter. The aim of discounting should be to encourage brand loyalty and increase repeat purchases. Which are the products you sell that increase loyalty? Look at all of your loyal customers, do they have a propensity to buy particular items as one of their first 3 purchases? If so, why not focus on these items for promotions? Are you making product recommendations online based on what you know about a user? Is your checkout flow mobile-optimised? Do you accept ApplePay, Google Pay or PayPal?
Think about mobile
This year I’ve done all of my Christmas shopping on mobile. The difference between mobile checkouts is incredible. Some sites make me type in all of my details, others are one or two clicks, taking all of my details straight from Apple Pay, Google Pay or PayPal. The most frustrating companies, however, are the ones that accept Apple Pay but only give this option on the payment screen, after I’ve entered all of my delivery details! These things are no longer trivial. Amazon has excelled because they do one thing well - they make buying stuff so easy, but their browsing experience is rubbish. However, they know that their customers know what they want to buy before they hit the site. Amazon’s internal search enables users to find what they want and buy it in one or two clicks. Customers won’t go through a time-consuming checkout flow when they don’t need to.
Data-driven customer experiences
Customer experience is the new differentiator. From a retail point of view, I was shopping for a handbag this Christmas. One retailer's website returned 11 items from an internal search for the term ‘handbag’ - none of these were a handbag, and they sold handbags! Most companies will track if a search term returns no results, but they should also be looking at search terms with poor click-through rates. Online filters are so important for mobile devices, users don’t scroll forever. A previous client of mine found that 50% of product clicks occur on the first 2 rows of products displayed on their product listing pages - that’s not many products so they need to be relevant. If you’re making product decisions based on revenue and not customer experience, your customers will notice. In order to make decisions about what’s important to customers on your digital platforms, data is key. You can't improve what you don’t measure. Get a full view of what your customers are doing, analyse key journeys and create hypotheses around how to improve them. Test, measure, learn, repeat.
Communicate with customers
When GDPR landed earlier this year, it came with a lot of unknowns. Many marketers still fear sending emails to customers as they view an email as a chance for the customer to unsubscribe from future emails rather than an opportunity to communicate with the customer. But if a customer has decided not to unsubscribe to your emails then they probably want to hear from you. Your goal as a retailer is to make conversations relevant to consumers - they are time poor and aren’t going to read things that aren't relevant to them. A wise, bald man once told me that an email to a customer should be a value exchange. Emailing someone for the sake of it is likely to annoy them and they’ll unsubscribe as a result. Make the conversation valuable - talk about new lines of items they’ve bought previously or targeted discounts on products they’ve viewed previously. What about using expiration dates, or typical consumption rates, and timing your communications to find out if they’d like to order another? How about doing this when they next visit your website or app?
So what’s next?
The future for many retailers is unclear. What is clear is that consumers have higher expectations and more choice than ever before. For a business to do well in this climate they need to a work out a way to maintain margin and keep growing revenue. Data is key to continually providing better experiences, and businesses need to work out which numbers they need to be looking at on a daily basis to identify problems before they deep discount.
It’s high time retailers woke up and focused on their customers, rather than vanity revenue targets, or they’ll cease to exist.