Best Buy's Diamond as Big as the Ritz
Is Touchy-Feely Customer Research the Way to Go?
March 23, 2006: Vol. 2, Issue No. 23
IN THE NEWS
Best Buy thinks outside the big box
In several concept stores located in the Midwest, Best Buy is gathering data about consumer behavior in retail outlets that are quite different from the "big box" stores normally associated with America's largest consumer electronics retailer. The new stores, with names like Eq-life, Studio d and Escape, are helping Best Buy understand how to improve the shopping experience of a new class of technology buyers.
—Tom Krazit, C/Netnews.com, March 21, 2006
Brad Anderson is CEO of Best Buy, the $28 billion consumer electronics and appliance behemoth with more than 700 big box retail stores.
At a Columbia University Retailing Leadership class, Anderson was asked how he viewed the threat of a smaller competitor, such as Tweeter, cutting into his share of market.
"With abject fear," Anderson said.
Anderson said that retailing was unlike a pharmaceutical company that owns patents and can operate under that protection. Retailers do nothing that cannot be copied, which means they have to continuously change and improve to keep ahead of the competition.
Brad Anderson is personally hot-wired to the academic and experimental community. In the Oct. 18, 2005, edition of this publication, I described how Anderson hired as a consultant Columbia Business School professor, Larry Seldon, author of "Angel Customers and Demon Customers: Discover Which Is Which and Turbo-Charge Your Stock."
Using Seldon's philosophy, Anderson trashed the lower quintile of his customer base. This is the legion of unprofitable shopaholics who buy only the loss leaders and resell them on eBay and/or buy merchandise to collect the rebates and then return the merchandise—the chiselers and shysters with time on their hands, who professor Seldon refers to as "devils."
Now on the prowl for "angel" customers, Anderson hired ESI Design to create a couple of touchy-feely boutique research centers so he could get to know how his customers think.
Incidentally, ESI stands for Edwin Schlossberg Inc., aka Mr. Caroline Kennedy.
The Premise—A Kind of Skunk Works
The Lockheed Martin Skunk Works calls itself a company of inventors, "not satisfied unless we devise a new solution—something smarter, something better." It was the Skunk Works that came up with the fastest jet plane in the world, the amazing SR-71 Blackbird that replaced the U2 as America's spy in the sky.
One equivalent of the Skunk Works in retailing is Best Buy's boutique operations in the Chicago area:
- studio d is an intimate electronics store in Naperville that operates under the belief that it is women who drive the sales of high-tech merchandise. It's stocked primarily with a limited inventory of digital cameras and notebook PCs and offers one-on-one classes in photo editing, scrapbooking and picture taking. Dawn Bryant, Best Buy spokesperson, said the chain is creating "an experiential environment around preserving memories." Ultimately, it is hoped that the information gleaned at studio d will help Best Buy understand how women relate to high-tech products and that the lessons learned will translate into displays and sales techniques that can be leveraged across its big box stores nationwide.
- Escape is studio d with testosterone, created for young male video gamers. This is the customer subset that NPD Techworld analyst Stephen Baker says is obsessed with what is new and cool and spends big bucks to acquire it. At Escape, these armchair 007s and Dale Earnhardts can try out the new gadgetry before buying it.
This is not cheap research. ESI, the design firm of Ed Schlossberg--a protégé of Buckminster Fuller who used to hang out with artists Jasper Johns and Robert Rauschenberg, and composer John Cage--has very impressive credentials. Included on his list of accomplishments are Sony Plaza, Unser Racing Museum, Ellis Island's American Family Immigration History Center and the Pope John Paul II Cultural Center.
The Kennedy family connection no doubt has helped, but enormously talented Ed Schlossberg would do just fine on his own.
ESI's studio d is 5,000 carpeted square feet with gentle lighting, blond wood, mood music, fresh-cut flowers and a yellow-and-white color scheme.
"It also provides a no-pressure consultative selling experience akin to Nordstrom, Pottery Barn or Williams-Sonoma," writes Alan Wolf in ESI's press release. "Staff members are personable, chatty and promote browsing, while empowering signage encourages customers to 'Play,' 'Learn,' 'Remember' and 'Explore.' "
Matthew Moore of ESI describes it as "community-centric retailing, where the store becomes part of your life." He added, "We have had the luxury of not having to generate lots of revenue initially."
Is Best Buy spending its research money wisely?
The Bang & Olufsen Epiphany
A full 180 degrees from this fuzzy, feel-good approach to customer research was Bang & Olufsen's experience many years ago. Headquartered in Denmark, B&O creates the highest-tech, artistically exquisite audio and video entertainment centers.
In the 1970s, one of my novels was optioned to the movies (no film was ever made, alas) and I took the money and bought a state-of-the-art Bang & Olufsen stereo rig that gave me bragging rights to owning a work of design on display at the Museum of Modern Art. I loved it then; I love it now.
For years, B&O operated on the assumption that its core customers were 25- to 40-year-old high-income urban yuppies. One day, an employee came across some cartons filled with warranty cards that customers had dutifully filled out and mailed in. With no system in place to process these documents, they were stored and forgotten. On hearing of the find, a marketing person decided to send them out to a marketing database company for analysis.
What came back changed the way Bang & Olufsen did business. It turned out the core customers were rich, high achieving suburbanites age 50+. Suddenly the company's entire marketing model was revamped—from the publications it advertised in to where it opened its stores.
For example, when my wife, Peggy, and I sold our business and moved to Philadelphia 14 years ago, we wandered into David Mann Audio in Center City to purchase a B&O CD player. Soon thereafter, David Mann was fired as a reseller and the only B&O store in the area is 20 miles outside of Philadelphia in King of Prussia, Pa.
In my opinion, a down-'n'-dirty database analysis of customers is a lot cheaper--and a lot more informative—than hiring Ed Schlossberg to design a money-losing experiential environment in the vague hopes of divining the inner workings of the young female mind as it relates to one high-tech product, the digital camera.
Takeaway Points to Consider
- For years, Bang & Olufsen assumed that its customers were urban yuppies. Remember: "When you assume, you make an ASS of U and ME.
- Best Buy's 700 stores get 500 million visits each year. Of those, CEO Brad Anderson found that 20 percent—or 100 million—were money losers. He figured out a way to discourage those folks from remaining customers, enabling him to concentrate on developing the top four quintiles.
- The old rule that 80 percent of your business comes from the top 20% of your customer file is pretty accurate. The object of marketing—apart from acquiring profitable new customers—is to make such attractive offers that all existing customers in one quintile will be moved up into the next quintile.
- The process starts with database analysis.
- Best Buy has records of 400 million profitable store visits a year—nearly a billion over 24 months. Except for the occasional cash customers, somewhere in the Best Buy computers are tens of millions of names and addresses plus the three most basic elements of customer analysis: Recency-Frequency-Monetary Value (RFM).
- Imagine if this file were bumped up against one of the giant direct marketing co-op databases or credit reporting agencies—or both—that could append to the retail chain's internal data the demographics and behavior patterns of all its customers.
- Suddenly Best Buy would really know its customers. It could rate them, know how and where to spend promotional money, find the ideal locations in which to open new stores, and create imaginative store displays based on knowledge of what the locals like to buy rather using a formula dreamed up by headquarters.
- In short, Best Buy would be sitting atop a proprietary marketing diamond as big as the Ritz.
- And this vast treasure trove of actionable information would cost a fraction of what Best Buy spent on studio d and Escape—its crunchy little retail baubles that bear only a tangential relationship to its core business model.
Web Sites Related to Today's Edition
Bang & Olufsen