Posts tagged: multi-channel

The Prizes and Perils of Free Shipping

Shipping charges. As customers, we HATE paying for them, and we LOVE getting them free. In fact, our feelings about shipping charges are so strong that we highly overvalue free shipping. We’ll spend money we didn’t plan to spend on products we don’t need in order to avoid dumping cash into those awful shipping fees, even when that incremental spending is much more than the shipping charge.

So, free shipping promotions are a powerful tool for retailers. But, if we’re not careful, overuse of free shipping offers could lead us down a path where free shipping becomes more an expectation than an attractive benefit. At that point, we’ll be left with the huge costs of subsidized shipping without incremental sales to support those costs. And that ain’t a pretty equation.

That said, strategic use of free shipping incentives can lead to incremental sales and greater brand loyalty. We’re probably all familiar with the various “free shipping when you spend $X” offers that are out there, so let’s consider some of the more innovative strategies in use today for free shipping:

Free shipping as part of the business model

Zappos really uses free shipping on purchases and returns as a key component of their business model. They encourage people to order multiple sizes of the same pair of shoes and return those that didn’t fit (or those they just didn’t like, for that matter). Free shipping removes a key disadvantage Zappos has to physical retailers, and in fact even provides an advantage for customers who can try on shoes in the comfort of their own homes.

Zappos’ CEO Tony Hseih has said Zappos is a customer service company not an e-commerce retailer, and free shipping is a big part of their customer service strategy. He’s also said Zappos looks at customer service as a marketing expense, which I think is an interesting perspective that might help the cost make business sense.

But free shipping both way at all times is not a sustainable business strategy without trade-offs. Zappos is not the low price leader in their category by any means. Even with their higher prices, public filings from the recent Amazon acquisition of Zappos exposed their relatively low profits as a percentage of sales. Zappos has certainly built a powerful brand with a loyal following so it looks to me like they’ve made the trade-offs work, but theirs could be a tough model for others to follow. I’ll be curious to see if the model continues to work within the Amazon business model.

Speaking of which…

Free shipping as a loyalty program

Amazon Prime is one of the more brilliant loyalty program innovations to come along over the last several years. For an annual fee of $79, customers can get free 2-day shipping on many key items and free standard shipping on many more. Again, this is a case of a pure-play e-commerce retailer looking to mitigate one of its disadvantages to physical retail. Amazon sunk some money into this program by giving away a lot of free trials, but they’ve since hooked people in to the fee. A recent Piper Jaffray analysis estimates Amazon Prime’s membership at 2 million people and growing at 24% annually. And once you pay $79 to get free shipping, you’re going to make the most out of it. Piper Jaffray found member spend growing from $400 annually to $900 annually!

But this again is an expensive proposition that wouldn’t be sustainable for most businesses. The $79 will help to defray some of the free shipping costs, but as with most paid loyalty programs that I’ve studied, customers don’t renew their memberships unless they’re getting a positive return on their investments. And Amazon, as a general merchandiser, can provide customers with enough product choices that they can visualize making enough purchases to get their money back and then some. Specialty retailers may not be able to offer a similar program on their own; although, I keep thinking there might be an opportunity for some third party to aggregate a bunch of retailers into a program in a way that might work. (Maybe that’s a future post.)

Free shipping as a store traffic driver

The previous two examples were pure-play retailers using free shipping as a way to mitigate a major disadvantage they have to physical retailers. So how can multi-channel retailers leverage the advantages they have with their multiple channels? Free shipping to stores is one way. When I was at Borders, we offered unrestricted free shipping to our stores as a cross-channel strategy in order to leverage the selection and experience of Borders.com combined with the convenience of picking up the order in our stores. Originally, we thought it would appeal mostly to urban dwellers who didn’t want packages left on their doorsteps, but it turned out to be a hit all around for people who just didn’t want to pay for shipping. Wal-Mart does something similar with their Site-to-Store program. And Borders just took it a step further with their recently announced “in stock guarantee” for their stores that offers free shipping to home for customers if the Borders store is out-of-stock on the item the customer came in to purchase.

But businesses offering free shipping without purchase hurdles often depend on additional future purchases to make the offering profitable. For example, we ran a lot of analysis at Borders on the free shipping to stores offer. We determined we needed X% of people to buy $X more in-store when they picked up their orders for the offer to make financial sense. With the new offering, it appears Borders is counting on pulling some market share from Amazon with the promise of books available right now in their stores.

There can be little doubt that free shipping is a powerful offer, but we have to be careful how we wield it. Someone recently told me that effectiveness of fire lies in prudence and intention. Used in a positive manner, it can provide great warmth and light but when used in a negative manner it can cause great destruction. Since I like overly dramatic metaphors, I’m going to compare free shipping to fire. Let’s be careful out there. :-)

What do you think? Should we be concerned about free shipping becoming an expectation? How do you use free shipping strategically?



The Case to Cross It Up

For any retailer with more than one channel, becoming cross-channel is a critically important way to fully leverage its assets to provide a greater experience to its customers, which ultimately leads to more customer retention, brand loyalty and, of course, sales and profits.

In an effort to highlight and tackle the issues associated with implementing cross channel strategies, Kasey Lobaugh of Deloitte Consulting and Jim Bengier of Sterling Commerce pulled together a Cross Channel Retail Consortium of retail thought leaders that included executives from a cross section of retailers as well as some industry analysts, vendors and yours truly for a day of discussion this past Sunday on the strategy, tactics and challenges of implementing effective retail cross channel experiences for our customers.

Before I delve deeper into my thoughts on the day, it’s probably worth defining “cross channel.” Many times, “multi-channel” and “cross-channel” are used interchangeably, but I don’t think they’re the same thing at all. “Multi-channel” is simply operating in more than one channel while “cross-channel” is leveraging the strengths of each channel to create an overall customer experience that is greater than the sum of its parts. It’s 1+1=3.

Sounds great, right? So, why aren’t more retailers doing it?

Three basic themes emerged from the group:

  1. Lack of executive and board level understanding of the value of customers transacting in multiple channels (and, conversely, the negative affects that occur when customers are prevented from interacting with a brand across channels)
  2. Lack of incentives for various employees, from executive to front line staff, to encourage shopping across channels
  3. IT systems limitations

So, let’s tackle these issues one-by-one.

1. Lack of executive and board level understanding of the value of creating cross channel experiences

The group agreed that getting the buy-in of the CEO is critical. No one believed, and I certainly agree, that a strategy as all-encompassing as creating a cross channel experience has any chance at success without the CEO actively driving it. So, just get the CEO to support it. Easy, right? Not so much.

In my experience, the best way to convince a CEO of the value of any strategy is to show him or her how it will maximize profits. One retailer in the room was able to show the value of customers shopping in multiple channels pretty easily by tracking customer transactions in all channels through a loyalty program. Others were able to do the same in various degrees, but the general concern was the potentially high cost of discounts provided in exchange for such information. (I have lots to say about loyalty programs, but I’ll save that for another post). Janet Sherlock of AMR Research extolled the virtues of emailed receipts as an environmentally attractive and altogether less costly alternative option to harness ID’d transactions. I find that proposal extremely intriguing.

While transactions tell us about customers who completed transactions in each channel, they don’t tell us about customers who researched online to buy in store or customers who took a look at products in store before buying online, and the group longed for an industry standard metric that could be used to assess the amount of sales influenced by the another channel.

Another driver of CEO support is attention to the issue from the Board. One retailer said all it took was a bad experience by one 17-year-old granddaughter of a Board member to get the issue front and center. Funny how life is, isn’t it? Who could imagine that one young girl’s frustration can drive a strategic shift in a major national retailer? But maybe the lesson here is about the importance of getting decision makers’ heads out of the financial spreadsheets and into real-life experiences to help them understand how their companies are (or are not) serving their customers.

2. Lack of incentives for various employees to encourage shopping across channels

One retailer described the challenges of focusing on customer experience at a retailer that is driven by “an imperialist merchant organization.” (There was no way I could write this piece without including that quote.) Merchants, by their nature, tend to care a lot more about product than customers. But in the end, they’re generally heavily driven by sales, margin and turn metrics. There are many cross channel strategies can be implemented to help merchants drive these key metrics.

For example, the web has many selling capabilities that are nearly impossible to achieve in store because of physical constraints. Customer reviews are extremely popular online and customers regularly report using them to make purchase decisions (both online and in store); however, they are very difficult to make available in a physical environment. Some retailers are making them available via in-store kiosks, but the kiosks are a large capital investment to make if they’re not already available. But just about everyone’s got a computer in his or her pocket or purse these days. Let’s make more use of mobile phone technology to give people access to customer reviews, recommendations, wish lists, gift registries, etc. in store while they’re standing in front of the products.

There are also advantages in stores than can be leveraged online. Many retailers have incredible experts in their stores. How can those experts build content that can be used by customers and other employees alike to improve the shopping experience? How about security? Should retailers start to look for ways to accept payment in their stores for web orders when customers aren’t comfortable paying online? Believe it or not, there are still a lot of customers out there who aren’t comfortable using a credit card online, and in this economy there are more and more customers who aren’t comfortable or aren’t able to use credit cards period. But they’re still interested in buying from us, and we should find every way we can to help them do so.

3. IT systems limitations

There’s no question that IT legacy systems cause us a lot of trouble when we try to integrate our customer experiences. But I also wonder how many times we fall back too easily on such an excuse. I’ve written about my Tree Stump Theory previously, and it’s certainly prevalent in this case. We have a lot of compelling reasons why systems prevent us from implementing such key capabilities as the ability to accept returns of online purchases in store. But guess what? Our customers don’t know those reasons, and even if they did, they don’t care. While many retailers have found ways around the returns issues, just as many still have not. Either way, the case to prioritize such efforts should rely on some of the same techniques described above to make compelling cases to the CEO and the incent imperialist merchants.

Pure play retailers, and especially Amazon, continue to grow at rapid rates by pulling more and more market share. Multi-channel retailers have assets in their stores that pure plays don’t, but it’s going to take implementing true cross channel strategies to leverage those assets in a competitively advantageous way. Let’s cross it up!

What cross-channel strategies have you implemented or are considering implementing? What are the barriers to cross-channel in your organization?

Photo credit: Wikimedia Commons



The Case for an E-Commerce IT Org Change

As multi-channel retailers move more and more towards implementing cross-channel strategies, organizational structures need to change to support those new strategies. I am a huge proponent of breaking up most e-commerce silo  organizations and integrating online and in-store marketing and merchandising teams to ensure a common vision and voice across channels. For IT, though, I actually recommend the opposite approach. I believe technology  professionals who work full time (or near full-time) on the e-commerce site should report directly to the head of e-commerce.

While at a high level is seems like technology should have the same kind of continuity as marketing and merchandising, I believe a close look tells a different story.

Here’s why e-commerce IT is significantly different from traditional IT:

In e-commerce, the business is technology

Traditionally, IT creates tools that help employees be more productive and efficient. However, in e-commerce, IT is actually creating software designed to generate revenue. E-commerce “stores” are really self-service software  applications designed to help customers perform a service — in this case it’s to buy the products and services we sell.  Intuit has Quicken; Microsoft has Word and Excel; retailers have our e-commerce sites. We really need to think about  our sites more as software products and organize our teams in a product management type of structure.

Also, a particular pet peeve of mine is when IT folks refer to those in other functions of the company as “the business.”  Just that reference alone insinuates that IT is not a crucial part of the overall business and creates a separation that  frequently leaves IT coming across as second class citizens, which they are not. While I’ve never liked “the business”  reference in any circumstance, it’s doubly bad in e-commerce where success absolutely depends on technology team  members actively working as part of the business.

Self-service applications require a different mindset

Working on an e-commerce application that is designed to be used directly by customers requires a very different  mindset than what is typically required when working on applications that support employees. Even when the  underlying technology is similar, the mindset required is substantially different. New employee applications usually  come with training programs and manuals. Moreover, employees are ultimately forced to use the app; they get used to it and get incrementally better at using it over time through daily usage. Customers, however, don’t get the benefit of manuals and training programs. They’re on their own. And if the experience doesn’t satisfy them, they give up and the sale is lost.

Site functionality and customer experience are major components of the e-commerce business strategy

The website application is a key differentiator for the business, and customer experience is hugely driven by site functionality. While functions other than technology certainly contribute to an e-commerce site’s success or failure, there can be little doubt that the quality of the technology is a massive contributing factor.

E-commerce is 100% dependent on technology to be open for business.

While technology is critical in all areas of the business, most retailers have offline contingencies for stores so they can  continue to make sales even if the system is down. Websites obviously don’t have an offline mode.

Web businesses are still immature and need considerable agility and flexibility to mature as quickly as possible

For many absolutely legitimate reasons, most IT organizations at multi-channel retailers have significant (and some might say onerous) processes in place to manage technology requests and roadmap prioritization. Because requests for technology improvements come from all corners of the company, it’s important for CIOs to ensure they are spending their resources on work that is thoroughly vetted and likely to generate the highest return on investment for the company. But given the absolute dependence of the e-commerce business on technology, typical IT prioritization and allocation processes are too slow for e-commerce businesses that need to be able to adjust quickly to issues that arise with customer experience.

The e-commerce competitive marketplace innovates far quicker than the brick & mortar marketplace

The CEO of a pure-play e-commerce company is in basically the same role as the head of e-commerce at a multi-channel retailer. If for no other reason than there is no alternative, the CIO of a pure-play reports to the CEO. This reporting structure gives the pure-play leader a leg up in agility and the ability to react to customer needs. In a multi-channel retailer, the CIO must split time between many functions of the business, and I find e-commerce often gets time allocated in a ratio roughly equal to its financial contribution to the business. While such an allocation is understandable given everything on a busy CIO’s plate, I believe this lessened focus can lead to stunted growth and lost ground to competitors such as Amazon who are more devoted to improving their software application and increasing their customers’ satisfaction with their site customer experience.

I believe if a head of e-commerce is to be truly held accountable for the success of the site, he or she should have  appropriate authority over such a major contributor to the success of the site.

So why should the head of e-commerce have authority over e-commerce IT and not e-commerce marketing and merchandising?

To me, it’s all about what faces the customer and what doesn’t. A brand should be clear to its customers about who it is and what it stands for, so continuity in marketing and merchandising trumps silo control over those aspects of the business. Site functionality has no parallels in other parts of the organization. Since it is both unique and customer facing, I believe the head of the online channel should maintain the authority to develop and execute the technical strategy for his or her business unit when it directly affects the customer relationship.

I’ll add this final point: I’ve lived through many different org structures surrounding e-commerce IT, and the only times I’ve found the pros to outweigh the cons of an org structure have been when e-commerce IT was part of the e-commerce operation and reporting to the head of e-commerce.

What do you think? Am I completely misguided? What structures have you seen work and not work? What structure do you think is ideal?

Retail: Shaken Not Stirred by Kevin Ertell


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