October 24, 2016

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Paradigm Shift: From Omni channel to select-channel retailing

Retailers can boost margins and customer engagement by focusing on multi channel retailing via select strategic channels, based on in-depth understanding of buyers, their journeys as well as unique business strengths

Over the decades, retailing has been a tough business to be in, typically offering thin margins. You and many of your peers around the U.S. have traditionally competed on price, economies of scale, or product range, to cite a few key dimensions of brand positioning.

However, as consumer expectations around affordability, convenience and other core aspects of shopping keep evolving rapidly in the new digital economy, merchants are being forced to overhaul their business models and venture into Omni-channel commerce.

After all, there is a clear and present danger to your top line and bottom line from surging e-commerce sales. Retail e-commerce, having expanded by 15% per year between 2004 and 2014, is estimated to account for 8% of a projected $5.6 trillion U.S. shopping market in 2016. And, average operating income across the industry is forecast to slide from 2.9% of revenues in 2015 to 2.5% this year.

How can one then thrive, in fact, survive, in such a cutthroat landscape? Omnichannel retail has been touted in recent times as some sort of panacea. So much so that it has become some kind of a credo, with almost everyone singing the ‘be wherever your customers are’ mantra.

However, the road has been rocky so far, with many merchants failing to realize the expected return on investment (ROI) with regard to their Omni-channel retail initiatives. The time has come for U.S. retailers to take a step back and question if being all things to all people is really the way they can grow profitably, gain market share, and enhance customer satisfaction.

You need to identify and invest in select strategic channels for Omni-channel commerce, based on a thorough understanding of customer journeys. By giving up the urge to target all channels, you can deliver a superior brand experience that would help improve your margins as well as customer loyalty.

Why rethink Omni-channel?

Here are some of the key reasons as to why businesses must reconsider their Omni-channel retailing approach:

  • Sales cannibalization: Even as merchants commit themselves to delivering a unified commerce experience, the resulting ROI is turning out to be negative at many instances. Retailers’ own online channels have been cannibalizing sales at their higher-margin, physical counterparts, adversely impacting overall gross profit.
  • Low margins: According to the Global Retail & Consumer Goods CEO Survey conducted in late 2014 by PwC, a mere 16% respondents said they could fulfill demands of Omni-channel retail profitably. Further highlighting the challenge of effectively meeting customer expectations from Omni-channel retail is a study by E&Y that found only 33% of those surveyed expecting increased profits by operating a multichannel strategy.
  • Increased costs: The accelerating transition in ecommerce from desktop to mobile purchasing has prompted U.S. retailers to make fresh, heavy capital expenditures, with the biggest firms spending at least 5% of revenues on scaling up and integrating their digital sales capabilities.
  • Supply chain complexity: Omni-channel retailing has added to the complexity of the supply chain, as merchants spread themselves thin in their attempts to market and sell to customers across all touch points. Retailers’ logistics value chains, spanning the entire distributed order management cycle, today face significant bandwidth squeeze, in turn impacting profitability.
  • Inconsistent brand experience: While retailers have opened up multiple touch points as per the Omni-channel retailing consensus, they have struggled to ensure a seamless customer experience across various channels. Furthermore, technology glitches in relation to online channels can significantly dilute brand image, as customer tolerance for such slipups keeps getting lower every day.

Refocusing on the customer

To ensure sustained relevance in a dynamic marketplace, you must reorient your multichannel retail strategy around core buyers , ones involving the highest customer lifetime value (CLV). A sharp focus on high-value and core customers can help you deliver distinct, enhanced buyer experience, translating into profitable growth.

So, how do you begin? First, define a business strategy for Omni-channel retailing that recognizes and addresses the requirements of your customers–including ‘preferred’ shopping channels. The idea is to drive differentiated engagement through a balanced mix of optimal touch points, for effective outreach to different target segments.

A McKinsey survey, undertaken in March 2014, showed that companies could grow revenues by 10% to 15%, and, boost customer satisfaction by 20%, through provisioning of superior, targeted brand experience across buyer journeys.

Select-channel roadmap

Essential steps that you need to take for establishing a selective setup in Omni-channel retail include:

  • Identify channels best suitable for distinct business functions such as marketing, sales and customer care, and revamp those touch points accordingly. Once the primary purpose of a given channel has been arrived at, you should reconfigure underlying business processes and IT systems to address customer use cases across the discover, purchase, and service journeys.
  • Evaluate the tangible and intangible benefits that each touch point delivers across an individual customer’s relationship lifecycle, and tweak your budgets for that channel to maximize ROI from Omni-channel retailing.
  • Use predictive analytics of behavioral indicators to determine CLV for individual clients acquired across.

    Consequently, identify and invest more in the channels that bring in your highest-value customers, while minimizing expenditure on ones that attract only lower CLV shoppers.

  • Diligently analyze the heat map of end-to-end, cross-channel customer journeys, spanning onboarding, initial engagement and problem resolution, to improve your relationship with each customer, and increase brand loyalty. This will also help you proactively identify and rectify any gaps in customer experience.

Key criteria for channel selection:

  • Market factors: Customer profile, organizational or individual buying, size of target market, geographic concentration, CLV
  • Product factors: Product lines, value density, product customization, lifecycle stage, product perishability
  • Operational factors: Desired engagement and service level, cost to serve, infrastructure and resource availability, expected ROI, after-sales service and returns management

The author can be contacted at Abhishek.Kalra@hcl.com