Professor Tom Davenport Advises Retailers To Cultivate Potential Benefits of Analytics

By Debbie Hauss
Industry experts and retailers themselves agree that most retail companies have not yet realized the full potential of the breadth of analytics available to them today. Economic climate aside, retailers must strategize for long-term success, and using analytics effectively can go a long way to creating security for businesses on the other side of the economic recovery.

Recently SAS and Teradata commissioned a study on analytics along with Tom Davenport, professor at Babson College and co-author of the book “Competing on Analytics.” The original plan for the study was to focus on specific themes related to analytics in retail, but Davenport quickly found out that first the industry needed to take a step back and evaluate all possibilities and potential retail analytics could provide. The recently published study is titled “Realizing the Potential of Retail Analytics.”

“I was surprised by the huge potential of retail analytics and the breadth of opportunities retailers have to choose from,” says Davenport. “But I was equally surprised at the lack of coordinated approach coming from retail businesses. It was difficult to find one person in retail who could speak to the broad range of analytical activities.”

Learning from the Best
During interviews with 33 retailers and more than 25 retail analytics experts, Davenport noted that the same companies came up over and over again when discussing best practices. Companies like Best Buy, Walmart, Target, Kohl’s and JCPenney have taken the lead in developing successful processes using specific types of analytics. But, he notes, none could speak to the complete realm of analytics resources.

Overall, Davenport found that “the companies that have aspirations to be big and successful are focusing most closely on analytics, including department stores, online retailers, and probably most of the large discount retailers.” But most retailers today are realizing the potential benefits of analytics, and some have very recently changed their outlook regarding analytics. “A few years ago I did some work with TJX and at the time they said: ‘We are traditional merchants and are not sure analytics relate to kind of merchandising we do.’ But they are not saying that anymore.”

Making the Best Analytics Choices
Given the breadth of choices available, and the fact that most retailers don’t have a huge amount of money for investment today, making the right choices is critical, says Davenport. He suggests that the first key step is to understand your company’s business strategy.

Ask the question: “What are we trying to accomplish as an organization?” For example, a number of analytics applications relate directly to understanding the customer, knowing what products they buy and developing a detailed understanding of what they want to purchase in the future. “Those applications make the most sense for organizations that have customers who spend a lot with them, have relatively high margin products and can afford to invest a lot in learning more about their customers,” he notes.

Other companies might want to focus their analytics choices elsewhere. “A discount retailer might want to focus on assortment planning or pricing optimization – two applications that deliver a quicker ROI.”

Retailers also can learn from their peers when making decisions about implementing analytics. “Today, everybody in retail should consider themselves in multichannel environment, and therefore should look at the leaders in that area such as Amazon and eBay. Those organizations are doing extensive testing, using lots and lots of web analytics, and collecting product recommendations.”

Outside retail, retailers could look to other industries for best practices. “The credit card industry has done a lot in looking at customer behavior,” Davenport notes. “And banks, Capitol One for example, have been very aggressive in the use of analytics and testing. Additionally, the travel and transportation really pioneered a lot of the pricing analytics.”

The 18 Most Common Analytics Applications
Taking an almost encyclopedic approach, Davenport constructed a list of 18 common analytics applications in his report. In explaining each application, Davenport notes best-practice retail examples. The list is separated into three distinct categories:

Widely Adopted Analytics Processes

1. Assortment Optimization and Shelf Space Allocation
2. Customer-Driven Marketing
3. Fraud Detection and Prevention
4. Integrated Forecasting
5. Localization and Clustering
6. Marketing Mix Modeling
7. Pricing Optimization
8. Product Recommendation
9. Real Estate Optimization
10. Supply Chain Analytics
11. Test and Learn
12. Workforce Analytics

Organizational Trends

13. Adoption and Use of Analytics
14. Analytical Ecosystems
15. Centralizing Analytics
16. Store-Level Empowerment

Strategic Initiatives

17. Analytical Performance Management
18. Multi-Channel Analytics

Looking to the Future
While many retailers are still getting their proverbial arms around the current analytics options, they also should keep their eyes on what’s coming down the road. Davenport notes five future analytics trends to watch:

1. Clienteling. “I think if you’re Brooks Brothers, Nordstrom or Nieman Marcus, you already are doing clienteling to some degree, but you going to use analytics to determine product selection in the future. This could be a relatively minor application to add.”
2. Video Analytics. If you’re really into fraud detection and shrinkage prevention, soon it will be possible to analyze video in that way, “but first the industry must wait for the vendors in this area to mature a bit.”
3. Sentiment Analysis. “It could be cool to know what customers are thinking about a particular fashion line and could help retailers select styles for fashion-oriented goods. I don’t expect this application to take off soon, though.”
4. Demand shaping analytics. “We are not that far away from this. Companies are already doing a lot of supply chain, pricing and assortment optimization. Once they get these systems connected they will be able to perform advanced demand-shaping analytics.”
5. Real-Time Offers. “This is already happening a fair amount in online and people in other parts of world are doing it with mobile technology, but the U.S. is lagging the world here. More and more of mobile phones are capable of transmitting proximity information, so I think it’s probably not that far off. We could easily see that a particular carrier and technology manufacturer (AT&T and Apple, for example) could partner to ask customers if they would like to be notified of deals they would be interested in when they are physically within the proximity of a retailer.”

While Davenport began the study before the most severe economic downturn, he hopes that retailers will continue to invest in analytics. “It is pretty clear that the really great, well managed companies continue to invest in analytics, even in a down economy.”

To access the complete study, go to http://www.sas.com/events/cm/622624/index.html.

Valentine’s Day Promos Show Love For Innovation Beyond Price Discounts

With Valentine’s Day spending projections down to $102.50 from 2008’s $122.98 figure, according to NRF, retailers were looking to spread the love and get consumers out spending. While some analysts expressed concern that too many retailers continued to pull the discounting lever, there were some signs this holiday that retailers are getting more creative with cross channel promotional offers that may shore up the broken pricing levees.
“Consumers have different perceived values and emotions for their loved ones, and marketers should try to better understand these differences and promote to consumers' emotions rather their wallets,” says Yoram Greener, Senior Director, DbM Consulting, Merkle. “Marketers need to realize that every promotion is an opportunity to build relationships with their consumers. Having said that, retailers need to look deeper into customer preferences and reactions to be successful. Competition on price is a dangerous value proposition, since you end up commoditizing your value proposition, rather build relationships.”

Although holidays such as Valentine’s Day and Mother’s and Father’s Day, represent smaller revenue opportunities compared to the fourth quarter, industry experts suggest they are a missed opportunity to engage with new customers. “Our research shows that when it comes to these holiday gift-giving opportunities, retailers really focus primarily on the fourth quarter, but they are missing the day in- day out opportunities you have with birthdays, anniversaries and smaller holidays that come around,” says Pam Danziger, president of Unity Marketing. “They don’t realize that gift-givers actually spend more money throughout the year for those occasional holidays than they do in total at Christmas time.”

Retail TouchPoints found the following bright spots for Valentine’s Day from the Valentine’s promotional landscape:

Tiffany’s nurtured last-minute shoppers by offering complimentary shipping and guaranteed Valentine’s Day delivery for customers who order online by noon today. In addition, the jeweler offered complimentary engraving in-store and online on select items Feb 2-9. While the company has a long standing policy against price promoting, they are thinking outside the little turquoise box to offer shoppers something different, while catering to customers by offering a personal touch.

Talbots, playing off the pessimistic consumer mindset, asked shoppers to share their worst Valentine’s Day gift ever on the retailer’s Web site. The grand prize winner gets a $1,000 Talbots wardrobe and a trip to NYC for a shopping day with Chief Creative Director Michael Smaldone. Second and third place winners win $500 and $250 Talbots gift cards.

“What I really like about [the Talbots promo] is that it encourages customer involvement,” says Danziger. “That’s the hook. It’s not the 20% off, but it makes the customer respond and become involved. It provides a platform of involvement and relationship with the customer that makes it so much more meaningful than simply buying a product or getting a discount. That’s making the connection.”

Sears is playing on the Valentine’s Day theme to sell some decidedly unromantic products. Its “Love this Sale,” which offered no payments or interests for 12 months on appliances over $300 with a Sears card, plus free standard delivery and haul away after Mail-In rebate.

“Most retailers define ‘loyalty’ as ‘market share,’” says Mark Lilien, consultant with Retail Technology Group. “True loyalty is defined as ‘price independence.’ It's the difference between Dell and Apple. For Valentine's Day, the best thing any large retailer can do: have merchandise of superior design not available elsewhere. For small retailers, have an assortment that's unlikely to be duplicated nearby.”