TNS Retail & Shopper

No, the Customer is NOT Always Right!

July 23, 2009 - by Herb Sorensen, Ph.D., Global Scientific Director, TNS Retail and Shopper
E-Mail: herb.sorensen@tns-sorensen.com

The First Face

Quite a number of successful retailers, over the years, have attributed a significant measure of their success to the principle that, "The customer is always right."  Here I want to give proper credit to this as a public sentiment, and at the same time point out why it is also outrageously WRONG!

Let's begin with the pernicious effects of high-low pricing.  For those unfamiliar, HI-LO refers to the widely practiced pricing method of charging really higher than necessary prices (HI) a good bit of the time, but enticing shoppers sufficiently with specials and cut prices (LO) on selected merchandise to give "the customer" the impression that shopping in this store is a good value, or at least, if the shopper is careful, can be a very good value.

Before considering the merits of such a pricing strategy, we need to have an alternative for comparison.  The alternative is to simply price everything at relatively constant margin (profit) for individual items, and as low as is consistent with prudent business practices.  This strategy is commonly referred to as "everyday low pricing," EDLP.

There is probably no such thing as a retailer that is purely HILO, nor any that are purely EDLP.  However, the rational economic approach, and what is best for everyone, really is the EDLP model.  This is because of the massive economic inefficiencies that accrue in HILO pricing, which ultimately must be charged to the shopper.  This is why the prices in HILO stores, on the majority of items, are higher than "necessary."  What makes them higher than necessary is two things: to make up for the loss of necessary margin and profits on the low price specials, and to make up for the massive inefficiency of continually raising and lowering prices. 

It is this second factor that is the real culprit.  And it is this second factor that led Sam Walton, in seeking to drive prices to their absolutely lowest possible point, to reject HILO pricing, and go for EDLP.  This required forced cooperation from suppliers, who were as engrained in HILO as were the shoppers.  That is, brand suppliers were accustomed to supporting retailers in their HILO pricing by marking down, from time to time, their wholesale prices.

What Walton did was far more fundamental than simply shifting to a superficial EDLP.  He insisted that suppliers remove all non-product costs from their wholesale prices, which included slotting fees, and any other trade and promotional allowances.  To understand this, Walton is in effect saying, "I will not pay you one penny more for your wholesale merchandise than it is worth, as delivered.  Why should I pay you what you are going to give back to me in slotting fees and promotional allowances?  I'll just keep that money and NOT charge you those fees."  There is massive inefficency in the retailer paying more than the merchandise is worth, in order to get some of that money back later in rebates, slotting fees and promotional allowances.  (There is an excellent discussion of this issue in Kahn's and McAlister's short book, The Grocery Revolution.)

There is a great deal more to this story, but the reality is that this is probably the single most important factor in driving the growth of Walmart to be the largest non-oil corporation in the world.  The relentless focus on low prices struck at the root of HILO pricing.  However, this doesn't mean that shoppers are committed to rational retailing.  Far from it.  And this is why Walmart still has specials, and advertising campaigns focussing on falling prices.  This partially explains why, if EDLP is such a good deal for shoppers, and fueled the growth of the largest retailer in the world, it explains why every retailer isn't going with EDLP.  In fact, another major retailer switched to EDLP some years ago, and the first year of EDLP received an incredible amount of abuse from shoppers in the form of hate mail and complaints.  "We have always relied on you to provide specials and really good prices, and you have now betrayed us."  However, the retailer stuck to their shifted strategy, and for the first time in 50 years, showed a profit on selling groceries!  (Many are unaware that the grocer's profits largely derive from those slotting fees, rebates and promotional allowances, NOT from "selling" groceries.  See my book.)

Now, if we put these facts about HILO and EDLP in the context of "the customer is always right," at least we can see that, objectively, it depends.  After all, it was customers who made Walmart into the world's largest retailer.  But the story is a good deal more complex than just this single pricing issue.  And for that story, I recommend that you get a copy of The Walmart Effect by Fishman.  Before we draw a final conclusion here, we need to look at one more customer/pricing illustration.

No discussion of pricing would be adequate without some recognition of the importance of coupons.  It should be no surprise to find manufacturers looking to capitalize on the efficiences of EDLP, sans coupons, to mirror the great success of their retail partners.  But, notice this:

[In the 1990's,] Procter & Gamble established an "everyday low-pricing" policy that reduced the retail price of its products without hurting the company's profits. While the move succeeded in reducing "peaks and valleys" in the process of manufacturing and selling products, it was not without controversy. For example, in January 1996, Procter & Gamble announced that it would end the distribution of all coupons and reduce regular prices in three New York cities: Syracuse, Buffalo, and Rochester. Other manufacturers said they would reduce or eliminate couponing in the area. However, Procter & Gamble soon encountered consumer boycotts, public hearings, and a petition drive demanding that they reinstate coupons. In March 1997, the New York State attorney general's office demanded that Procter & Gamble end the test. [Novel Guide.]

Notice that the self-appointed consumer advocates came out in force to bring a halt to this move to EDLP, as if shoppers interests are best supported by a bulwark of HILO, the coupon.

The sum of the matter is that shoppers are more in love with the idea that they are saving money, than the actual saving of money.  It is a fact that a shopper who follows closely the weekly specials, clips, organizes and uses coupons copiously, can save substantially, even more than by simply shopping at an EDLP store.  But this is at a significant personal cost to the shopper in terms of their time, transportation from store to store, etc.  It is actually a worse economic deal than learning to count cards at the casino.

It is a verifiable fact that card counters can consistently "beat the house" when gambling at a casino.  Of course, if "the house" recognizes that you are card counting, you can expect to be unceremoniously evicted.  Retailers don't typically evict shoppers for excessive use of specials and coupons.  Why would they?  It's their suppliers that are footing the bill, with a vast and costly engine that prints billions of coupons, (most will be unused and end up in the trash,) distributes them, collects them, and charges the brand, that builds the cost into their price to the retailer, who passes it on to ALL of their customers.

There is a great deal more evidence that shoppers do not behave in rational ways.  But then, gamblers don't either.  And many shoppers are quite happy to shop in the casino-type HILO stores, thinking that surely all these specials (and maybe coupons,) really are saving us money.  As one of my favorite philosophers, Josh Billings, used to say, "The trouble with most people isn't that they don't know, . . . but what they 'know' . . . ain't SO!"

GSR: unsuitable for FMCG shopper research

July 29, 2009 - by Siemon Scamell-Katz, Founder TNS Magasin
E-Mail: siemon.scamell-katz@tns-global.com

TNS Magasin is constantly searching for ways to refine our research and deliver ever more authoritative insight: for example we’re working with fMRI techniques to understand more about the role of memory in store as well as using EEG.

The combination of these powerful methodologies is fundamentally challenging many received ideas about in-store decision-making. At last we are able to gain insight into responses to the visual stimuli that the shopper actually looks at, as well as prefrontal cortex responses. This enables us to gauge the relative roles of emotion and cognition at each and every stage of the shopping journey to understand, literally, what is going on in shoppers’ minds.

This has the most fundamental ramifications for marketing and new product development alike. Brands really need to go back to basics and redefine what they are trying to achieve in the light of what is nothing less than a whole new dimension of knowledge about their customers.

However, as the importance of shopper research is being increasingly recognised, a lot of companies are trying to jump on the bandwagon without any experience in the field or knowledge of the most appropriate tools. Techniques using Galvanic Skin Response (GSR) are a typical example.

We judge that GSR is unsuitable for FMCG shopper research. GSR measures physiological responses such as skin conductivity and temperature in an attempt to gauge emotional reactions. But in so many FMCG categories there is little or no shopper involvement as their purchases are habituated: much the same week in, week out. Because there is insufficient difference in emotional arousal between these categories, GSR is simply not sensitive enough.

Siemon Scamell-Katz

The Misguided Bobbing of the Long Tail

July 28, 2009 - by Herb Sorensen, Ph.D., Global Scientific Director, TNS Retail and Shopper

E-Mail: herb.sorensen@tns-sorensen.com

For those not familiar, "the long tail" consists of all those items in the store which rarely, or possibly never, make a sale. This phenomena is true, whether you are considering the full store, a single department or category, or even a single brand. Some stuff is in the store, even though it really doesn't sell.

After presenting some stark data about the long tail, I will explain why it is so valuable, nonetheless. But first some hard observations. A friend who had moved into the position of VP of Marketing for a significant regional chain of supermarkets, noted to me that they were in the process of SKU rationalization of their stores. (Otherwise known as SKU-Rat, range management or whacking at the long tail - my tongue in cheek.) For this year, management had set as their goal to eliminate all items in the store that didn't sell a single copy in the entire year! The following year they were going to get really radical, and eliminate all those items that had not moved at least five copies in the entire year. NOW we are getting aggressive.

What did you think about all those tens of thousands of items in the store? Did you really think they were all selling to "someone?" The fact is that with 50,000 items in the store, 50% of those contribute less than 5% of the sales! That means you could simply remove half the items in the store and lose only 5% of the sales.

But wait! Do you really think that people would buy less with half as many choices? Don't you think shoppers would simply substitute something else to take the place of what they are mostly not buying now, anyway? In fact, the book The Paradox of Choice documents that giving shoppers excess choices actually suppresses sales. The typical household only buys 300 - 400 distinct items in an entire year, and only half of those on a regular basis, week in, week out, year after year. That half, the 150 - 200 items dominate the opposite end of the sales curve, the 3% of items that contribute a full third of the stores sales. These relatively few items constitute the Big Head, the dominant contributors to total store sales. (All figures cited vary to an extent from store to store.)

So why is all that long tail stuff in the store, anyway? Primarily because the brand suppliers are paying the retailer to put it there. So how about just stopping doing that? It's about as complicated as nuclear disarmament. In simplest terms, the brand can't just unilaterally surrender shelf space. But that is far from the whole story. After all, a number of retailers around the world have just chopped off the long tail, completely, and reduced total item count in the store to the few hundred level.

In every case I know of, big head stores have been very successful. However, in every case I know of, the big head also begins to grow a long tail! That is, what started as a radical shift to just a few hundred items, in a few years becomes thousands of items again. Aldi and Lidl have doubled their SKU count, Tesco's Fresh & Easy is increasing SKU count to counter Walmart's triple count compared to Fresh & Easy, and Stew Leonard moved from his original 800 items to a current 2000 items.

In fact, I am quite certain that any long tail store, could beat any big head store in direct competition. (Long tail stores always have a big head, too. And, as noted, big head stores tend to grow at least a vestigial long tail.) I'm certain the long tail store could win over the big head store for two very important reasons:

1. The long tail is VERY attractive. That is, even though the shopper is not personally interested in all those tens of thousands of items, they are very pleased to be in a store that probably has everything they might need. The purpose of the long tail is to attract shoppers to the store, where, once there, they will buy mostly the big head. For example, I buy a few books a month, often from Amazon. A major reason is that I figure that anyone with 50 million books, probably has the ones I want.
2. The problem with the long tail is not that it is in the store, but that retailers and brands use it to "hide" the big head. That is, the cardinal "sin" at retail is to fail to clearly demarcate the offer for the customer. Offering a wall of merchandise for the shopper to sort out, is no offer at all. Most shoppers are buying a relatively limited range of items. Most other shoppers are buying many of the exact same items - check your transaction logs. These are the few items whose sales are being suppressed in the hopes of selling more of the long tail. It is a very costly and failing proposition for brands and retailers.

Regardless of your type of store - or your category or brand - your greatest potential for additional sales is with those few items that are already selling well. For example, one store resorted to the simple expedient of telling their shoppers which those top sellers were:

And what was the result of these few dozen "top seller" tags scattered across the store, calling attention to all the shoppers' first choices? Something like a 54% average lift on these items; and a 4% lift the first quarter of 2009 for total grocery sales, reversing a long slide in sales beginning early in 2008.

The simple point of all this is that -

The Long Tail attracts shoppers to the store;
where they will mostly buy the big head - sell it to them!

Returning then to our title, The Misguided Bobbing of the Long Tail, the point isn't that trimming of the long tail is not in order. Rather, that the economic benefits of this trimming, at it's best, pale in significance in comparison to a focus on actively promoting/selling those few big head items. We have illustrated above one low-tech way of doing this for the whole store. However, for an individual brand, the package may be the best way for a product to shout out, "Buy me! Most other shoppers do!" Maybe something like this would work for you:

This is a suggestive illustration of how a brand might develop a motif that quite soon would educate shoppers as to the brand's own "Shoppers' #1 Choice." The burst announces the message, and the related "framed" package clearly demarcates the offer - essential for interrupting the scanning, filtering eye. The important thing is for the brand to NOT call out more than one item.

An example of #1 positioning by Coke:

Here's to your own GREAT "Shopping!"

TNS is the world’s leading agency for shopper research

TNS is the world’s leading agency for shopper research. Herb Sorensen and Siemon Scamell-Katz are renowned industry thought leaders who share a passion for observing, measuring and understanding shoppers and the shopping process throughout the world. This blog aims to provide you with some of their latest thoughts and insights on the Retail and Shopper industry.

Breaking the Habit

July 15, 2009 - by Siemon Scamell-Katz, Founder TNS Magasin
E-Mail: siemon.scamell-katz@tns-global.com

Note: Siemon Scamell-Katz has many years of experience studying shoppers in-store. For more than a decade he has specialized in eye-tracking studies that cataloged the detailed fixation by fixation focus of the shopper on the variety of stimuli in their visual space. The insight he has gotten from his visual research very well complements my own understanding of the matter, and this essay of his gives further richness to the 3D Purchase model we discussed some time ago. This present issue provides more depth to the comments Siemon offered in the March 12 issue of The Views: " Changing the Habits of a Lifetime."
Herb Sorensen
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In our industry, it is vital to understand the mechanics of shopper choice. The fundamental driver is that some purchases are more important to consumers and shoppers than others.

Decisions that are really important, like choice of car, are made consciously. Such decisions often sustain perceived status and involve purchases of high financial value or visibility. While advertising plays an awareness role, consumers look to peers or trusted editorial for endorsement.

Secondary decisions involve much less research. The items involved such as breakfast cereals or coffee, are functionally important but have relatively little impact on status. These are often commodities that are purchased on a regular basis and therefore ‘choice' is habituated.

Finally there are items that are not very important to shoppers. For these, they rely on retailers to pre-select a range of simple options. They generally use very simple tools such as price to confirm their choice.

Individual category roles depend on the frequency with which they are shopped and shoppers' level of involvement, but every category can, and should, be assigned an appropriate role in-store with varying emphasis on visibility and theatre.

In addition, the majority of shopper decisions are not based on the decision tree model (although the traditional approaches to brand management, category management, merchandising and marketing presuppose that they are).

Shopper decisions are instead influenced by a mixture of reasoning, emotion - and memory. Explicit memories are the result of high attention (to advertising, word-of-mouth or editorial, for example). Implicit memories result not from attention but from subconscious associations.

Implicit memories probably account for about 85% of in-store ‘decisions'. This is why colourshape is the key to recognising packs in-store, for example.

The typical shopper has extremely low involvement with the majority of categories: purchases from all but a few categories are habituated. The majority of shoppers always buy from the same repertoire of products.

Habituated shoppers may be loyal because they are committed or because they are unconcerned. However, floating shoppers may like several brands; be unhappy with a particular brand; or not care which brand they buy.

Brands should seek to understand the behaviour ‘scripts' of both habituated and floating shoppers. And by understanding the relative significance of implicit and explicit memories, it is at last possible to connect the consumer and the shopper.

This makes it possible to embed implicit - as well as explicit - cues for shoppers in advertising and create strategies for shopper marketing, promotions, pricing and merchandising for both groups of shoppers.

Brand communications should incorporate high attention elements to invoke analytical memories, as well as broad associations (for example of colour and shape) to stimulate in-store recall of implicit memories.