by: John Sviokla
The front page of yesterday's Wall Street Journal reported how Tesco in the UK is beating up on Wal-Mart's Asda chain by using Clubcard data to analyze their customers and create new offerings including providing beer discounts for new fathers who can no longer head to the pub, increase their beer purchases when they pick up the nappies for Junior.
Wal-Mart management says that the increasing sophistication of use of data at Tesco had little to do with Tesco's success, which is the dumbest comment by management I have ever heard attributed to the world's largest retailer.
Think about the myriad fortunes that have been made by turning data into dollars: First Data in credit cards, Progressive in auto insurance, 7-Eleven Japan in convenience stores, Harrah's Entertainment in gaming -- each have dominated their industry by doing three related things -- creating a more sophisticated model of customer behavior, creating more detailed and customized segmentation of offers and combinations of their products and services, and designing new products and services to meet the discovered needs of their customers. In any business that has thousands or millions of customers the only way to "get close" to them is to perform sophisticated data analytics.
Why? Well the economic reasons are very straight forward. The Tescos of the world are first, to understand new segments which means that they are discovering new pockets of the "demand curve" -- which allows them to capture value other can't, as we saw with the interaction between beer and diapers (as the father of five I could have told them that, but I needed the coupon for vodka, not beer). Anyone who is a student of commerce knows that the more informed customer has more differentiated demand. Today's customers have been educated on many, many products and services, and therefore there are many more niches in the market to serve. Pick any category -- from tea to tampons, and you see the evolution of product complexity serving a more and more sophisticated market. Product lines branch as naturally as a tree. More and more businesses need to adopt analytics to find the new value for customers, and over time they act more like the oil business where they use sophisticated analytics to make sure they are digging in a the right place. It has been over 15 years since BP has drilled a dry well, due to comprehensive understanding of where the value lies locked in the earth.
Also, in this country we spend something like 1/2 trillion dollars on advertising and promotion. For the most part, we do "dumb" promotions, like free standing inserts in the Sunday paper with coupons aimed at an average demographic. Tescos, First Data, Harrah's, and the whole crew created much more targeted promotion which create a virtuous circle of increasing conversion (Tesco reports conversions as high as 20% on offers, which is an order of magnitude greater than a typical "good" promotion take rate) and then the customer willing to open the offer because it is usually relevant. Customers too want better targeting of messages.
Furthermore, these organizations have the organizational capability to drive their findings into new actions by the organization. When Gary Loveman took over as COO of Harrah's entertainment, he fired almost all the old marketing people and replaced them with heavily quantitative, analytic types. He took back the decision rights to do promotions from the regional casinos in places like Lake Tahoe, and Atlantic City, and created a national promotional calendar, and set of offers. Furthermore, he made the customer information the property of the central corporate entity -- so that a good Atlantic City customer might get the chance to go to Vegas, which was not in the interests of the local casino manager, but was in the interest of Harrah's overall. In other words, he put in place organizational processes, and incentives to make sure that they not only had the capability to do the analytics, but the execution process to make it real in the marketplace. Today, Gary is CEO, and has taken second rate firm and made it one of the top two gaming companies in the world.
If it is so obvious why don't more companies do it? Well, I think there are at least three reasons. First, many organizations do not have a fact-based analytic culture. If your VP of marketing is not comfortable with sophisticated statistics, you probably have a culture that is non-analytic. Second, many organizations have fragmented data on customers and customer behavior, and aren't willing to make the necessary investment to bring the relevant data to bear. Third, and this is the most common problem, the power structure of the organization does not allow for implementation of findings. I was working with a major consumer packaged goods company that had an experiment that showed the efficacy of increasing the granularity of couponing from a five digit zip code, to a nine digit zip code. By doing this, they could increase sales by 2-4% in a business where category growth was 1-3% per year! Yet, due to the politics of the organization and who owned the brands, and thereby brand marketing, they could not get the successful pilot implemented in the field at scale.
From the executive's point of view, it is vital to remember that the natural tendency of any system to get smarter, faster, when it has more communication and feedback. With ever expanding digital description of everything, and the interconnection of all people and devices, the customer's IQ is going up faster all the time. Winning companies use comprehensive analytics to raise their Customer IQ faster than their competition. It is so obvious, that is often overlooked. Who knows, maybe Wal-Mart will not be able to go that next level of detail -- to the customer -- and will thereby become vulnerable after such an incredible run of success.
Original Post: http://www.svioklascontext.com/2006/06/turning_data_in.html