Best Buy Counts Customers

In their new book, Return on Customer, Don Peppers and Martha Rogers explain why corporate America needs to realign its focus from selling products to giving customers what they really need. In this excerpt from Chapter 3, they discuss how Best Buy has made strides to achieve such a customer-centric focus.

Understanding what customers need from you is vital to your firm’s long-term success. In many industries, customer-oriented firms can secure a competitive advantage, and this competitive advantage can easily translate not only into higher earnings but into a higher price-earnings ratio for a company’s stock as well.

Customer-centric firms such as Dell, Royal Bank of Canada and Best Buy concentrate on raising their returns on specific customer segments. The combination of increased earnings and an increased stock rating can catapult such firms’ stock prices upward. This isn’t about “marketing.” It’s about your company’s ability to succeed and grow.

Take Best Buy’s recently launched “customer-centricity” effort, for example. Best Buy trained its store-level employees to recognize and think about the different needs of five types of highly valuable customers:

• Affluent professionals who want the best technology and entertainment experience
• Active younger males who want the latest technology and entertainment
• Family men who want technology to improve their lives—practical adopters of technology and entertainment
• Busy suburban moms who want to enrich their children’s lives with technology and entertainment
• Small-business customers who can use Best Buy’s products and services to enhance the profitability of their businesses

After a successful pilot project involving 32 stores, the company began rolling out its customer-centricity initiative to an additional 110 stores. A UBS analyst report suggests that this initiative should provide Best Buy with stronger financial results as the company refines its program. It also should provide less cyclical results, as more stable relationships with high-value customers counteract shifts in general consumer spending and demand for consumer electronics. The UBS report also notes that employee empowerment is crucial to the success of Best Buy’s program. “Best Buy empowers its store-level employees—those individuals closest to its customers—to tweak merchandising, store signage, store layout and so on to best appeal to [particular customers],” the report says.

For example, a Pasadena store employee explained how store-level associates had suggested a reconfiguration of the store to better appeal to suburban moms, moving small appliances down onto a low rack along the store’s main walkway, rather than leaving them stocked on higher shelves among the major appliances. According to the report, “sales of small appliances skyrocketed to well into double-digit gains from moderately negative.”

The report continues, “The employees in the appliance department…next plan to create displays that showcase items such as refrigerators, stoves, and washers and dryers in home-like settings along the perimeter of the appliance department [and] to develop a child play area…so that customers have a way to entertain their kids….”

Best Buy’s initiative is based on seeing its business from the customer’s perspective, understanding customer needs and then attempting to meet those needs. The company says the stores included in the pilot project have seen gains in comparable-store sales more than twice as good as other U.S. Best Buy stores and a gross profit rate higher by about 0.5 percent of revenue.

According to Brad Anderson, the vice chairman and CEO of Best Buy, customer centricity is now viewed as a core competence that the company wants to develop, as a way to strengthen its operations, its employee performance and its ability to build brands.

“We believe that if we succeed in linking those capabilities, we will clearly differentiate Best Buy from our competitors,” Anderson said in commenting on the firm’s quarterly earnings. The key to Best Buy’s financial success, in other words, is its ability to see things from the customer’s perspective.

Ready, Fire Aim

Still, it is extremely difficult for most companies to see their value proposition from the customer’s perspective, rather than from their own. Usually, when companies launch initiatives or undertake major programs designed to put customers first or cultivate long-term customer relationships, they fall short because they focus first on the customer’s value to the enterprise, rather than the enterprise’s value to the customer. It’s a “ready, fire, aim” approach to customer centricity. No matter how accurately you discern the nuances of a customer’s value to you, you can only influence the customer’s behavior by understanding your value to the customer. Trying to figure out how to generate economic results by analyzing the customer’s value is simply looking through the wrong end of the telescope. Customers rarely know or care what their value is to you. They just want to have their problems solved and their needs met, and every customer will have a slightly different twist on what he or she really needs.

The problem is that customer needs are difficult to understand and complicated to deal with. Moreover, customer needs are dynamic, rather than fixed. Consumers are changeable creatures. Lives evolve from one stage to another, they move from place to place, they change their fickle minds. Business customers also evolve, adopting new strategies, switching out managers, and facing new competitive situations. And a customer’s needs at a particular point may be based on a situation or mode of purchase. For example, even the most frequent business traveler will occasionally be traveling for leisure, and will have different needs than when traveling for business.

As a starting premise, it’s important to distinguish between your customer’s need and your product’s attribute or feature. In fact, different customers often want the same attribute or feature in order to satisfy very different individual preferences. One person might buy a high-performance car, for instance, because he wants to drive fast, while another might buy the same high-performance car because he wants people to think he drives fast.

In addition, you have to constantly remind yourself that because customers are different, understanding what the average customer needs is not the same as figuring out what a particular customer needs. When you focus on products and brands, you’re concerned with identifying the needs that your most valuable customers have in common. But today’s market segmentation analyses have become so sophisticated, you can easily be lulled into thinking you understand your “customers,” when what you really want is to understand each customer.

If customers are your scarcest resource, then the more value you can create from each one, the more your business will be worth. Adding a service or product to an existing configuration, in order to meet the customer’s need more completely, is one way to increase the return on that customer. The only caveat is that any new offering should be made in a way that reinforces your basic competitive strategy and doesn’t undercut whatever structural advantage you may enjoy.

Consider the Dutch natural gas utility Eneco Energie, for example. In a deregulated market this company sells a commodity product subject to brutal price competition – a truly bleak business, with low margins and little opportunity to create value. If a new entrant, unhampered by fixed infrastructure costs and union contracts, were to appear on the scene, an incumbent like Eneco would be facing a natural exodus of its biggest customers, all looking simply for the lowest cost per cubic meter. Rather than settling for this bleak scenario, however, Eneco has backed up from the product they are selling (natural gas), in order to get a better view of the need they are meeting for the customer, from the customer’s own perspective. It turns out that some of Eneco’s largest customers operate commercial greenhouses. For such a customer, Eneco will install remote monitoring equipment to track each greenhouse’s temperature, humidity and carbon dioxide content. Their proposition with the customer is no longer limited to selling natural gas at the lowest price, but subscribing the customer to the correct environment for each greenhouse being operated.

So what business is this Dutch utility firm really in? At least for one group of customers Eneco is in the “environment management” business, rather than the “natural gas” business. This allows them to cement relationships with valuable customers whose equity grows with their mutual entanglement with Eneco. Because Eneco’s product is so intimately involved in solving a greenhouse operator’s broader problem—as it is seen from the operator’s own perspective—Eneco ensures that the customer has an incentive to continue the relationship. How much cheaper would a competitor’s natural gas have to be for a big greenhouse customer to “uninstall” Eneco and start over?

Seeing things through your customer’s eyes has the potential to point you in a number of different directions for increasing your “Return on Customer.”

Eneco is a case in point, but it’s not hard to think of similar opportunities in other businesses:

• For a computer manufacturer selling PCs, servers, and other equipment to businesses, how might Return on Customer increase if the company were to provide an online resource for managing each business customer’s inventory of PCs, properly configuring and upgrading them for different departments, and controlling the purchase-order process so as to conform to the customer’s own budget restrictions? (This is exactly what Dell Computer does for its enterprise customers, using the Dell Premier Pages service.)
• A home insurance company that puts its own customers into direct contact with local repair people can increase its Return on Customer with respect to homeowners.
• A pharmaceutical company can increase its ROC by providing better, more comprehensive advice to its physician-customers about treating a whole therapeutic range of conditions, rather than just the specific symptoms related to the pharmaceutical company’s own drug.
• A cable television company can increase its ROC by offering on-demand movie packages and broadband internet access. Many cable companies do this already. But since they already have a wired connection into the home, how about monitoring and managing household thermostats, providing voicemail or answering services, setting up home security packages, and the like?

As you acquire more insight into your customers’ needs you will identify unmet needs and opportunities to sell completely new services or products. All you have to do, really, is put yourself in your customer’s position and imagine you are trying to solve his problem yourself. What more does the customer need, in order to solve his problem that he can’t already buy from his vendor (i.e., you)?

Degussa AG, for example, is a $14 billion German based multinational in the “specialty chemistry” business. In the United States, its Degussa Admixtures division sells a number of specialty chemicals for improving the performance characteristics of concrete. Most of Degussa Admixture’s customers are construction firms and concrete producers with multiple locations. At each location where concrete is mixed, chemical tanks for the additives are maintained by the site manager, who is responsible for ordering new chemicals when needed. Degussa developed a remote tank-monitoring system that uses wireless sensors to relay inventory information to a website that both Degussa and the customer can access. Now the company can anticipate when replenishment is needed by each of its customers, ensuring that their chemicals are always in stock. Customers like this system, not only because they no longer have to pay so much attention to inventory management, but also because they save money with just-in-time replenishment. Degussa likes it because it reduces their own delivery costs, ensures that customers always have their chemicals in inventory, and gives customers a good reason to stay loyal. In short, their Return on Customer has increased.

Walk a Mile in Their Shoes

The logic behind anticipating a customer’s need is compelling. If you know what she needs, then you can be better at figuring out what she’ll want next, and when. Data-rich firms today can adjust their understanding of individual customer needs in real time, on the fly, as they interact with a customer and develop a richer transaction history. Again, the effect is not only that your customer is more likely to get the most appropriate products , but also that you waste less time and resources trying to sell other, less relevant, products to that customer.

Three basic types of insight can help you anticipate what your customer needs: memory, editorial inference, and comparisons with other customers. Your memory of a customer’s past choices or preferences is the simplest and most direct method of anticipating her future needs. When she rents a car and doesn’t have to specify the car model, credit card, or insurance options, the car rental firm is using its memory of her past transactions or the profile she specified in order to anticipate her. If a florist’s customer sends flowers to her mother on her birthday, the florist can remember the date and anticipate her need for flowers the next year.

A second way to anticipate a customer’s need is to use your memory of the customer, as above, but to couple it with some type of content or “editorial” categorization. The fact that a customer celebrates her mother’s birthday with flowers means she might want to celebrate Mothers’ Day, too, or perhaps some of her other relatives’ birthdays. Because a customer buys music CDs she might be interested in CD cleaning solutions or CD players. If a customer buys Italian suits, he might be interested in Italian loafers. The fact that a customer has bought business books on enterprise growth and relationship management might mean he’s interested in buying Return on Customer.

Third, you can anticipate a customer’s needs by comparing this customer with other customers. Every customer is unique and individual, but customers have similarities as well. Almost everyone who has rented Movie A has also liked Movie B. People who like books by this author also tend to like books by that one. People who wear this type of clothing also tend to drive this type of car. Your goal in making such comparisons is simply to do a better and better job of anticipating what it is that any particular customer needs.

Looking for ROC in All the Right Places

A good brand can help a firm offer a wider array of products or services to solve a broader portion of its customers’ problems. A brand gives its owner permission, in the eyes of customers familiar with it, to engage in the different kinds of activities associated with a customer’s more broadly defined need. Conversely, when a company solves a greater portion of its customers’ problem, or meets a greater proportion of the customers’ need, not only will it generate a greater Return on Customer, but its brand will become stronger, as well.

Tesco, the UK retail grocery chain is a great example of a company that has used its powerful brand name to gain permission to sell a wide variety of products and services to customers. Both in its physical stores and through its relationships with on-line consumers, Tesco has succeeded in categories far removed from “grocery retailing.”

Renowned for its frequent-shopper program, Tesco has been interacting with customers at the point of sale and tracking those interactions since 1995. When a customer presents her card to ensure she gets whatever discounts she’s entitled to, the company can link her current shopping visit with all her previous shopping, compiling a comprehensive transaction history and assembling a “picture” of the customer, based on the things she’s bought. The customer might fit neatly into one of several lifestyle segments that Tesco has created as a way of categorizing its different customers by their grocery needs – from “convenience” to “finer foods” to “cost conscious.”

Using this data, Tesco customizes its discounts and other offers to the individual needs of each customer. Ten million customers each quarter are mailed some four million variations of coupon offer, based on each individual customer’s history and profile. The program generates #100 million of incremental sales annually for the retailer.

At the individual store level, Tesco’s data can show the firm which products must be priced at or below competitors’ prices, which products have fewer price-sensitive customers, which products need to be “every day low price” to be successful, and which have different levels of price elasticity for different types of customers. This kind of data gives Tesco the insight necessary to generate store-specific prices, whenever it chooses.

Today, based on the strength of its brand, and its increasingly detailed relationships with its individual customers, Tesco has expanded its offering far beyond groceries. On Tesco’s website you can buy books, computer games, CDs and DVDs, consumer electronics products, flowers, and wine. You can take out a loan or a mortgage, procure a credit card, open a savings or retirement account, or book a trip. You can buy insurance for your car, your life, your home, your pet, or your vacation. And you can arrange for low-cost gas or electricity services, Internet access service, and mobile or home telephone service. In addition to all this, you can get advice on health and diet issues, babies, and families. More than ten years after launching its original customer relationship program, Tesco’s brand now stands for a great deal more than “groceries.” It is a brand that consumers have come to trust, based on the company’s own culture. In a trusting relationship, the customer is more willing to consult the brand with respect to additional products and services that may appear to be outside the scope of the brand’s original offering.

By using technology to expand its relationships with customers under the shelter of a powerful brand, Tesco has dramatically increased its growth potential, and as a result its publicly traded share price has grown commensurately. Which is worth more? Tesco the chain of retail grocery stores, or Tesco the multi-channel home solutions provider? When the only thing Tesco sold was groceries, its growth potential was limited entirely to the groceries category. But today, now that the company sells so many other things, its customers’ growth potential is much greater—that is, the same customer base can create a great deal more value than would have been possible just a few years ago.

Think Like a Customer

To increase your value as a business, you either have to get more customers or you have to change the behaviors of the ones you already have, or both. You can only create lasting value for your business by creating value for customers, and you can only do that by understanding what it is that customers themselves actually value. Think like a customer, and you’ll see that quality, convenience, timeliness, price, and satisfaction all count. Think like a customer, and trust and fairness will suddenly become indispensable considerations; their absence will be a deal-breaker. Surprise: Customers and trust are boardroom issues.

Because customers are your scarcest resource, the surest route to increased shareholder value is to understand what your customers need, and to offer products or services that meet those needs as completely and relevantly as possible. Because customers are your scarcest resource, every decision you make should be evaluated in terms of the return it generates on this resource. Your company should be making its decisions on the basis of Return on Customer.

Reprinted by permission of Currency Books. Excerpted from Return on Customer: Creating Maximum Value From Your Scarcest Resource. Copyright 2005, by Don Peppers and Martha Rogers; All Rights Reserved.