Success in the new market requires going back to the retailing basics
By Kurt Peters
The new reality in e-retailing was much in evidence at eTail 2001 in San Francisco in February. The stars of the show were the bricks-and-clicks and catalog retailers. And almost every speaker acknowledged that, even though the industry has been through a lot in the last three years, e-retailing is only starting. “We’re taking the first steps on what we think will be a 1,000-mile walk,” Shelley Nandkeolyar, vice president of e-commerce for Williams-Sonoma Inc., said in the opening address.
Indeed, the issues that the conference grappled with were the issues that retailers have dealt with for years—only, now complicated by the web:
— How to identify customers and create a customer relationship.
— How to market to customers.
— How to provide customer service.
— How to build an infrastructure to accommodate all channels of selling.
— How to create a customer-centric operation rather than product-centric.
“The customer experience is as important as the product itself,” Nandkeolyar said. “You must enhance the experience beyond the product.”
The new way of e-retailing is the result of many developments of the past year, Ray Arthur, CFO and senior vice president of ToysRUs.com, told the conference. “There have been many changed perceptions in the last year,” Arthur said. “The first-mover advantage is over-rated; building a brand on the web is costly; it takes more sales than expected to build a first-rate web site; there is a bottom to the capital markets; and bricks-and-clicks are well-suited to succeed on the web.”
ToysRUs is itself a good example of how selling on the web has changed. ToysRUs was the whipping boy of holiday shopping 1999 when it operated its own web site and left many customers disappointed on Christmas. Today, it is one of the leading e-retailing web sites, thanks to its recognition that bricks-and-mortar retailers need help to succeed on the web. Its partnership with Amazon.com has brought advantages that added up to push ToysRUs into the leading online toy retailer last year, even though it was not the first toy retailer to go on the web. The benefits that Amazon brought included a proven fulfillment system, a “world-class web site,” in Arthur’s words, marketing that leveraged campaigns by Amazon as well as ToysRUs, and higher efficiencies, Arthur said. “The whole process was very difficult and very emotional,” Arthur said. “ToysRUs wanted to protect its brand and Amazon wanted an excellent customer experience as well as to protect its brand.”
Hold the pepperoni
Throughout the ToysRUs-Amazon negotiations, both sides had to understand the cultural differences between the two organizations. Those differences were underscored during a late night session when negotiators ordered pizza. “We all got the meat pizza, they all got the veggie pizza,” Arthur said.
Today, ToysRUs provides the buying, merchandising, inventory control and management, marketing and content management while Amazon provides site design and maintenance, content development, fulfillment, customer service and marketing to its customers. Since the two reached agreement, Arthur said, “Our path to profitability has taken a quantum leap.” Traffic to Toysrus.com last year was 3.5 times what it was in 1999.
ToysRUs is also a good example of how an established retailer can leverage its brand to drive web traffic. In November, ToysRUs mailed 60 million Christmas wish books. The company placed a computer icon beside every item available on the web site. It included icons and product reference numbers in each of its newspaper ads. It included signs, posters and shelf signs promoting the web site in all 700 ToysRUs and 100 BabiesRUs stores. It included register displays and the URL on all shopping bags. During the holiday season, 1.8 million store shoppers each day were exposed to the promotions. “We participated in this for very little incremental cost,” Arthur said.
While most bricks-and-clicks and catalogers can leverage their marketing the way ToysRUs has done, they still must adopt other Internet-specific ways of bringing in customers. One of the most commonly used and most successful is e-mail marketing. J.C. Penney, for instance, has 4.2 million opt-in e-mail customers. “We are marketing to customers who are already online, rather than bringing customers online,” Paul Pappajohn, president of JCPenney.com, said. In 2000, JCPenney.com had sales of $294 million, up 188% from the year before and accounting for 9% of all merchandise sales at J.C. Penney. In addition, there is evidence that J.C. Penney’s web site is moving market share: 23% of JCPenney.com customers are new to J.C. Penney.
Spam e-mails, though, are not effective. Egghead.com, for instance, has an e-mail marketing program of 4.7 million e-mail addresses, of which 3.7 million are active customers; 60% of those receive regular e-mails from Egghead, which sells computers, software and computer supplies. “This is not spam,” said Jeffrey Sheahan, president and COO. “It’s providing a service that helps them buy more efficiently.”
Egghead’s marketing starts with analysis of customers’ behavior. “We want to know what they looked at on our site,” he said. “Did they take the questionnaire? What did they look at but not buy?” Each customer is assigned to a customer service rep, who calls the customer to develop a relationship. Egghead puts all the data about customers into a single marketing database.
Many conversations
From there, Egghead develops an e-mail dialogue with the customer. “You want to have many conversations with your customers,” Sheahan said. Egghead uses e-mails to highlight add-ons to purchases to capture high-margin items; cross-sells; new product information; newsletters about issues customers might be interested in; promotions from vendors; and information about recent orders, including updates and status reports. In addition, Egghead allows advertising from vendors, as long as it is relevant and consistent with the Egghead message.
Finally, Egghead has created graphically interesting e-mails. Those e-mails have a click-and-buy ratio of 40%. “We see dramatic increases in customer behavior as a result of this kind of e-mail,” Sheahan said.
Part of the beauty of e-mail marketing, Sheahan said, is that it is so inexpensive—“pennies per e-mail.” But that low cost also could lull some into not treating the medium as seriously as high-cost marketing campaigns. “You have to measure results,” he said. “Don’t let the relatively low cost of e-mail make you shirk that responsibility.”
Among the tools that Sheahan urged: use control groups; test discounts, coupons and other offers; and score customers on the basis of recency, frequency and monetary value. “E-mail is the most cost-effective marketing you can do if you spend time learning about your customer,” Sheahan said.
The follow-up
Retailers can collect e-mail addresses in a number of ways, starting with the most basic—asking web customers to provide addresses for order confirmation or other questions in regards to their orders, then asking permission to use the e-mail for marketing. That’s not as easy as it sounds. Sheahan reports 40% of Egghead’s customers opt out of e-mail marketing as soon as they give an e-mail—consistent with industry experience. J.C. Penney collects additional e-mail addresses by asking all 150,000 sale associates to collect e-mail addresses from in-store customers. Clerks enter the e-mail address into the point-of-sale terminal, which forwards it to a marketing database.
But traffic and sales don’t always translate to a successful web site; the follow-up is just as important. The conference featured much discussion about creating and maintaining a customer relationship. “Relationships are important, but they are hard to build,” Pradeep Singh, president of Talisma Corp., a vendor of e-customer relationship management systems and chair of the first day, told the conference. “The Internet redefines all customer service; it’s not just another form of customer service.”
One retailer that has practiced that lesson from its start is Amazon.com, Bill Price, vice president and general manager of customer service, said. “From the very beginning, Amazon’s mission has been to be the most customer-centric company on earth,” he said.
Amazon operates nine customer service centers around the world. The closing this year of a customer service center in Seattle was the result of a reduced need for customer service, Price said. Orders per customer-service contact have gone to 230 from under 100, he said. That has been the result of Amazon’s beefing up self-help capabilities. For instance, order histories are online and customers can check the status of orders any time. Customers can confirm, change, cancel and consolidate orders on their own. In addition, the help section has been re-designed to make it more searchable so customers can find what they want without calling customer service. Today, Amazon sexperiences three to four times the number of visits to its self-help section than it does calls to its customer service centers.
In addition, Amazon has adopted some good, old-fashioned ways of dealing with customers. It employs order specialists who can deal with special requests, it offers free replacements and refunds with “few questions asked,” and it has eliminated time limits for customer service calls on particularly complicated customer service questions.
Price recounted an example of how Amazon takes extra steps to create great customer service. In the middle of last year, Amazon accepted pre-publication orders for the fourth Harry Potter book. Amazon charged customers for standard shipping, with the belief that Amazon would get the books in advance and could ship them to customers to arrive on the publication date. Only later did Amazon learn that the publisher would not release books before the publication date, which fell on a Saturday. Thus Amazon, which had orders for 400,000 books, faced the prospect of customers receiving the books after the publication date, thus creating many dissatisfied customers whose friends who had gone to bookstores and gotten their books before them. Amazon decided to send all books for next day, Saturday delivery.
One thing that Internet selling has taught retailers is the importance of being fluid. For instance, Williams-Sonoma has 90 people in its e-commerce operation and they’ve been through a constantly changing organization, Nandkeolyar said. “We’ve been through many re-organizations that have helped us create a clear vision about what this was all about,” he said.
One of the ways in which organizational thinking has to change is in regards to the issue of whether customers should return web purchases to the store. Many customers prefer that option. But in some cases, store managers have objected because they get dinged for returns. J.C. Penney has dealt with that issue by giving stores in the area where a customer lives credit for Internet sales. “This requires a mindset of letting go of preconceived notions,” Pappajohn said.
And so in the end, today’s e-retailing world is requiring retailers to go back to the basics—focusing on what the customer wants. “This is all about putting the customer at the center of everything we do,” said Anne Marie Blaire, director of Internet brand development for Intimate Brands, owners of Victoria’s Secret. J.C. Penney has addressed that issue by re-designing its web site. Customers can search for products by size, brand or price. “We wanted to a create a customer-centric shopping experience, not a product-oriented experience,” Pappajohn said. “They can take different search paths depending on how they are shopping.”
It all comes down to the customers’ wants and not technology. “Develop the strategy first, then the technology to meet that strategy,” said Sally McKenzie, division vice president of EddieBauer.com Above all, McKenzie said, “Start with the basics and keep it simple. Listen to the voice of the customer.”
kurt@verticalwebmedia.com
Pure-plays have to change their mindsets as well
Clicks-and-mortars and catalogers weren’t the only stars shining at the eTail 2001 conference. A few pure-play, dot-com retailers—as well as an interesting hybrid—were on hand to tell how they are weathering the Internet storm.
Kenny Kurtzman, president of Ashford.com, outlined the steps Ashford has taken to succeed:
— “We have a real business model. It sounds trite but it’s important not to have a site that relies on 100 million customers to make money.”
— “We have no debt.” The company keeps it that way by finding ways to reduce customer acquisition costs, keep operating costs flat as volume grows, raise margins, improve inventory turns and build customer loyalty.
Similarly, Martin McLanan, CEO of RedEnvelope.com, said the success of the company is the result of keeping a lid on G&A costs, leveraging experience in technology and retailing and targeting its marketing. “We don’t want our brand everywhere,” McLanan said. E-mail campaigns and agreements with selected retailers and portals are key. “The last thing you want is great brand attributes but no call to action,” he said.
As evidence of RedEnvelope’s success in branding, 40% of its target market of households with incomes over $75,000 are aware of the brand. RedEnvelope boasts 400,000 customers and an average order of $80.
William van Cleave, vice president of marketing for FTD.com cited key factors to online success:
— Echoing Kurtzmann, he said retailers must have a “real business model.”
— Furthermore, “Go where your customers will be. Don’t think they will always be where they are today.”
— “Let the customer define the brand,” meaning don’t definine your brand too narrowly.
— Finally, “Use common sense.”
Today, 83% of FTD orders come through the web. While FTD.com is a sort of pure-play retailer, the brand does represent 17,000 real-world flower shops that license the FTD service. The average order over the web is 4.4% higher than by phone, web customers buy 10% more often than phone customers, retention rate is twice and lifetime value three times that of phone customers.
