LOG 561 RETAIL MANAGEMENT

BUILDING AND SUSTAINING RELATIONSHIPS IN RETAILING

What is Value? (cont.)

Channel

Perspective• Value is a series

of activities and processes (the “value chain”) that provide a certain value for the consumer.

Customer

Perspective• Value is a perception

that the shopper has of the value chain.

• It is the view of all the benefits from a purchase versus the price paid.

Value and value chain…

Value Chain (Porter,1985)

Role: disaggregates a firm into its strategically relevant activities in order to identify and understand sources of competitive advantages

The value chain is unique to each business

…Competing in a business involves performing a set of discrete activities, in which competitive advantage resides

The Value Chain• An analytical tool that describes all

activities that make up the economic performance and capabilities of the firm.

• It is used to analyze and examine activities that create value for a given firm.

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The Basic Value Chain

Inbound Logistics

Operations

Outbound Logistics

Marketing and Sales

Service

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Identifying the Value ChainValue

What buyers are willing to pay

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Primary Activities

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Value Chain Analysis

• Allows the firm to understand the parts of its operations that create value and those that do not

• A template that firms use to:– Understand their cost position

– Identify multiple means that might be used to facilitate implementation of a chosen business-level strategy

Copyright © 2004 South-Western. All rights reserved.

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Value Chain Analysis (cont’d)

• Primary activities involved with: – A product’s physical creation

– A product’s sale and distribution to buyers

– The product’s service after the sale

• Support activities– Provide the support necessary for the primary

activities to take place

Copyright © 2004 South-Western. All rights reserved.

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Value Chain Analysis (cont’d)

• Value chain– Shows how a product moves from raw-material

stage to the final customer

• To be a source of competitive advantage, a resource or capability must allow the firm:– To perform an activity in a manner that is superior

to the way competitors perform it, or

– To perform a value-creating activity that competitors cannot complete

Retail Value Chain

• Represents the total bundle of benefits offered to consumers through a channel of distribution• Store location and parking, retailer ambience,

customer service, brands/products carried, product quality, retailer’s in-stock position, shipping, prices, image, and other elements

Potential Pitfalls to Avoid in Planning a Value-Oriented Retail Strategy

• Planning value solely from a price perspective• Providing value-enhanced services that

customers do not want or will not pay extra for• Competing in the wrong value/price segment• Believing augmented elements alone create

value• Paying lip service to customer service

A Value-Oriented Retailing Checklist• Is value defined from a consumer perspective?• Does the retailer have a clear value/price point?• Is the retailer’s value position competitively defensible?• Are channel partners capable of value-enhancing

services?• Does the retailer distinguish between expected and

augmented value chain elements?• Has the retailer identified potential value chain elements?• Is the retailer’s value-oriented approach aimed at a

distinct market?• Is the retailer’s value-oriented approach consistent?

A Value-Oriented Retailing Checklist (cont.)

• Is the retailer’s value-oriented approach effectively communicated?

• Can the target market clearly identify the retailer’s positioning?

• Does the retailer’s positioning consider sales versus profits?

• Does the retailer set customer satisfaction goals?• Does the retailer measure customer satisfaction levels?• Is the retailer careful to avoid the pitfalls in value-

oriented retailing?• Is the retailer always looking out for new opportunities

that will create customer value?

Customer Service• Expected

customer service is the service level that customers want to receive from any retailer such as basic employee courtesy.

• Augmented customer service includes the activities that enhance the shopping experience and give retailers a competitive advantage.

Expected Versus Augmented Levels of Customer Service

• Expected– Must have elements; do not differentiate retailer. While absence of these expected values provides anguish, presence does not provide satisfaction

• Augmented—Services that can provide a competitive advantage. Double warranty, special delivery, product demonstrations

Figure 2-4: Classifying Customer Services

Fundamental Decisions• What customer services are expected and what

customer services are augmented for a particular retailer?

• What level of customer service is proper to complement a firm’s image?

• Should there be a choice of customer services?• Should customer services be free?• How can a retailer measure the benefits of providing

customer services against their costs?• How can customer services be terminated?

Turning Around Weak Customer Service

Focus onCustomer Concerns

Empower FrontlineEmployees

Show That You AreListening

Express SincereUnderstanding

Apologize and Rectifythe Situation

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Customer Relationship Management (CRM)

• A business philosophy and set of strategies, programs, and systems that focus on identifying and building loyalty with a retailer’s most valuable customers.

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CRM

• All customers are not equally profitable, and more or less profitable customers need to be treated differently

• Retailers now concentrate on providing more value to their best customers using targeted promotions and services to increase their share of wallet – the percentage of the customers’ purchases made from the retailer

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Customer Loyalty

• Committed to purchasing merchandise and services from a retailer

• Resist efforts of competitors to attract the loyal customer

• Emotional attachment to retailer– Personal attention– Memorable positive experiences– Brand building communications programs

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Can Offering Price Discounts Achieve Customer Loyalty?

No! Retail strategies like these can be

copied by competitors

These strategies encourage customers to be always looking for the best deal rather than developing a relationship with a retailer

McGraw-Hill Companies, Inc./Gary He, photographer

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Identifying Best Customers

• Estimating Lifetime Value (LTV)– The expected contribution from the customer

to the retailer’s profits over his or her entire relationship with the retailer

• Use past behaviors to forecast future purchases, the gross margin from these purchases, and the costs associated with serving the customers

• Classifying Customers by recency, frequency, and monetary value of purchases (RFM Analysis)

(c) Brand X Pictures/PunchStock

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Which Customer Probably Has the Greatest Lifetime Value

Purchases Over Last 10 Weeks

1 2 3 4 5 6 7 8 9 10Jack $20 $20 $20 $20 $20 $20 $20 $20 $20 $20Jill $210 $0 $0 $0 $0 $0 $0 $0 $0 $0

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The CRM Process

CRM is an iterative process that turns customer data into customer loyalty through four activities:

1. Collecting customer data2. Analyzing the customer data and identifying

target customers3. Developing CRM programs4. Implementing CRM programs

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CRM Process Cycle

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Collecting Customer Data:Customer Database

• Transactions – a complete history of purchases– Purchase date, price paid, SKUs bought, whether or not the purchase

was stimulated by a promotion

• Customer contacts by retailer (touch points) --visits to web site, inquires to call center, direct mail sent to customer

• Customer preferences• Descriptive information about customer

– Demographic and psychographic data

• Customer’s responses to marketing activities

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Collecting Customer Data: Identifying Information

Approaches that store-based retailers use:• Asking for identifying information

– Telephone number, name and address• Offering frequent shopper cards

– Loyalty programs that identify and provide rewards to customers who patronize a retailer

– Private label credit card (that has the store’s name on it)• Connecting Internet purchasing data with the stores

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Privacy Concerns

• Control over Collection– Do customers know what

information is being collected?– Do customers feel they can

decide upon the amount and type of information collected by retailers?

• Control over Use– Do customers know how the

information will be used by the retailer?

– Will the retailer share the information with third parties?

Steve Cole/Getty Images

Category Management

• Retailers often follow three core principles:

1. Focus on Strategic Management of a Product Group

• Customer shopping behavior• Categories defined by retail type

Definition of Category

• Category- Groups of products- Related or

substitutions

• Space utilization

Brand Management

Customer’s buying behavior and decision making hierarchy

• Value of the brand– Profit generated

• Retaining and acquiring new customers

Brand Management Category Management

Category Management

2. Collaboration between Retailers and Vendors• Trade Partners

3. Satisfying the Customer’s Needs• Shopping preferences, routines, and

shopping styles

Principles of Category Management• Retailers listen more to customers• Profitability is improved because inventory more

closely matches demand• By being better focused, each department is

more desirable for shoppers• Retail buyers are given more responsibilities and

accountability for category results• Retailers and suppliers must share data and be

more computerized• Retailers and suppliers must plan together

Figure 2-7: Elements Contributing to Effective Channel Relationships

Three Kinds of Service Retailing

• Rented goods services– leased cars, hotel rooms, carpet cleaning equipment

• Owned goods services– plumbing, appliance repair, • Non-goods services– haircut, professional services

(physician, lawyer)

Four Characteristics of Services Retailing

• Intangibility• Inseparability• Perishability• Variability

Figure 2-8a: Characteristics of Service Retailing

Intangibility

• No patent protection possible• Difficult to display/communicate service benefits• Quality judgment is subjective• Some services involve performances/experiences

Figure 2-8b: Characteristics of Service Retailing

Inseparability

• Consumer may be involved in service production• Centralized mass production difficult• Consumer loyalty may rest with employees

Figure 2-8c: Characteristics of Service Retailing

Perishability

• Services cannot be inventoried• Lost revenues from unsold services are lost forever• Effects of seasonality can be severe• Planning employee schedules can be complex• Need to balance supply and demand (yield management pricing)

Figure 2-8d: Characteristics of Service Retailing

Variability

• Standardization and quality control hard to achieve• Customers may perceive variability even when it does not actually occur• Need to industrialize/mechanize/service blueprint services to factor out variability

Figure A2-1: Lessons in Service Retailing

Examples of Consumerism in Retailing

• Proper testing of items for safety issues• Programming cash registers not to

accept payment for recalled goods• Charging fair prices for goods in short

supply• Age labeling of toys, warning labels on

goods beyond legal requirements

QUESTIONS???