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Five Rules For Retailing In A Recession

In tough times, many retailers instinctively rush to what they know by unleashing a host of new programs and initiatives geared toward serving their most loyal customers. Though it seems sensible and may have worked in the past, that instinct is more than likely a trap in today's economy.

Your most loyal customers are not your best source of revenue growth in a recession. Because you're already collecting most of the money they're spending, any drop in spending will come primarily out of your revenue. At the same time, it will be difficult to attract customers who are fiercely loyal to other retailers. So, what are retailers and marketers to do?

'Switch' to Success

Your best opportunity lies with "switchers" -- the people who spend money both in your shops and elsewhere. If you can collect a higher share of spend from this group, you'll still realize a net gain even if their total spending is declining. And, you'll be well positioned to build on those gains when the recession eases.

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Drawing on a study of more than 50 major U.S.-based retailers and over 20 years of global consulting experience, my colleagues Ken Favaro, Tim Romberger [of Marakon] and I have identified five operating rules to help retail executives determine where to direct recession-squeezed resources for the biggest return.

These rules boil down to:

(1) Identify the people who are shopping both in your stores and in others'.

(2) Discover what they're buying elsewhere (or want and can't find) and adjust your offer to provide it to them.

(3) Analyze which of your costs contribute to producing the benefits the switchers want, then spend more on those activities and less on the ones that don't matter to them.

(4) Organize your efforts efficiently by grouping your stores into clusters, based on different populations of switchers.

(5) Focus your customer research, merchandise-planning, performance management and strategic-planning processes on the switchers.

By following these rules, struggling retailers will discover that they have a larger universe of growth opportunities than they might think.

An E-Tailer's Advantage

I've been asked several times how these rules might apply to e-tailers. While that was not a focus of our research and set of conclusions, there are some potential applications primarily focused on rules one and two:

  • Online retailers can identify and target switchers more easily than traditional retailers can. For instance, look for customers whose average spend is considerably lower than average for your site, especially if they also exhibit a pattern of visiting frequently and not buying anything. These customers are probably also shopping around on competitive sites.
  • Attempt to interview a sample of such visitors. Ask questions about what they are trying to accomplish at your site (information gathering or looking for the best price on an item they've already decided on), what other online and offline shopping they are doing and what merchandise they are seeking that might be missing or not easily accessible on your site.
  • Develop programs and site experiences geared toward the needs of switchers based on what you learn. Vary merchandise mix, landing pages and promotion offers. Be aware that different kinds of switchers might be visiting during different times or in different regions. Several treatments might be required to capture the full potential of these programs.

This approach obviously can't make the challenges of the recession go away, but it can give savvy e-tailers a competitive advantage and help them weather the tough times.

1 comment about "Five Rules For Retailing In A Recession ".
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  1. Kevin Horne from Verizon, May 1, 2009 at 11:32 a.m.

    "Your most loyal customers are not your best source of revenue growth in a recession. Because you're already collecting most of the money they're spending, any drop in spending will come primarily out of your revenue."

    That, of course, is the perfect logic for why loyal customers ARE your best source of revenue.

    It might be more accurate to call switchers your best source of NEW revenue. And they would be your best targets coming OUT of a recession. Which should be the emphasis of any "tips" from this point. It's a tad bit late to be talking about what to do IN a recession.

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