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In today’s evolving marketplace, retailers face a “world of extremes” characterized by unprecedented complexity, intense competition and market polarization. Customers are increasingly demanding relevant value propositions that meet their individual needs and preferences and will seek out those retailers able to provide them. This new environment requires a shift in thinking from “bell curves” to “well curves” – as growth and perceived customer value migrate to opposite ends of the competitive spectrum. Retailers thus need to become truly customer-centric in strategy and execution to avoid being overtaken by more sophisticated competitors. Customer centricity starts through a deeper understanding of the multiple dimensions and drivers of target customers’ shopping decisions. By developing unique, proprietary insights about their customers, retailers can create a more tailored and relevant shopping experience which sets them apart from the competition.
How are customer value drivers fragmenting? What do today’s shoppers want in different situations? The IBM Institute for Business Value recently conducted new research among U.S. shoppers in several product categories to investigate different customer “needs states.” In this paper, we present a selection of our findings to highlight the value of new and innovative analytical techniques in building deeper customer insights.
Five “megatrends” for 2010
In a previous in-depth report on the future of the retail marketplace, we identified five deep-seated trends that are reshaping the business environment (for more details, see the Related publications section at the end of this document for the IBM executive brief “The retail divide: Leadership in a world of extremes”):
- Customer value drivers fragment. Micro-market segments are resulting from pronounced shifts in demographics, attitudes and patterns of behavior. Customers are “trading up” to premium brands and simultaneously “trading down” to lowcost providers.
- Gatekeepers become more guarded. Overwhelmed and time-strapped customers are exerting greater control over their interactions with businesses. Empowered by new technology and regulation, they will more aggressively protect their identities and personal data from “me-too” marketing tactics.
- Information exposes all. Customer choices are being shaped through unparalleled access to information – virtually wherever, whenever and however they want it.
- Megaretailers break the boundaries. The world’s top retailers are rapidly expanding across geographies, formats and product/service categories, blurring market segments and devouring market share.
- Partnering becomes pervasive. Leading companies are creating flexible “value networks” based on strong integration and collaboration with alliance partners. Competitors will be challenged to match the responsiveness and agility of these “connected” market leaders.
These megatrends are driving the industry to a “world of extremes” where customer diversity and individualism are pervasive, and traditional segmentation is rendered inadequate. Customers demand low prices for basic goods, but pay premiums for products that matter more to them personally. Consequently, those best positioned to grow and succeed will be huge megaretailers on one end of the spectrum and targeted retailers on the other, while undifferentiated companies, lost in the middle, risk fading into irrelevance.
Corporate thinking thus needs to switch from “bell curves,” where firms try to serve a generic mass market but do not meet anyone’s needs particularly well, to “well curves,” where companies drive growth by applying distinct models in each part of their business to deliver the greatest value to explicitly defined groups of customers (see Figure 1).
Driving innovation through deeper insight
To succeed in this world, retailers need to craft and execute upon a truly customercentric value proposition (or a well-defined set of them) that addresses the needs of their target customers. The first step is to embrace and understand today’s shoppers and how their needs are evolving.
Recalling our first megatrend, customer value drivers are inherently multidimensional and getting more complex all the time (see Figure 2). Traditional classifications (largely based on demographic characteristics) are increasingly inadequate to accurately predict whether and to what degree new retail initiatives (for example, in marketing, merchandising and store services) will succeed in generating the desired customer response. Retailers need to develop deeper customer insights through more sophisticated approaches to segmentation and innovative analytical models.
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