Published November 6, 2018
The retail sector has experienced unprecedented brick and mortar consolidation over the past several years. We are living in a time where retailers are trying to recraft their go to market strategy and redefine the competitive balance between bricks and clicks. Many have finally come to the conclusion that these channels play off of each other and must be a part of the go forward strategy to provide the product access and service response the customer requires.
What are customers today really requiring? More than anything, they want a clear understanding of the product cost (e.g. shipping and base cost) so they can decide which channel to purchase from. While cost is a consideration, digging deeper into the consumer psyche may unearth behavioral drivers that help steer the strategy for those struggling players.
Mattress Firm Learning
Recently, Mattress Firm (with 3,300 stores) filed for bankruptcy protection under the weight of its store network. Many have pointed to its store overexpansion from its purchase of Sleepy’s (2016), Mattress Giant (2012), and organic growth. This over capitalization of retail sites has generated internal cannibalization of same store sales. This has been compounded by the competitive pressures from additional online retailers (e.g. Casper, Amazon, etc.)
I have often wondered how these stores survive given their presence on every street corner in rural America. If proximity is the only driver of an ability to increase selling, they should be king of the hill. Is there a point where you can be too close to your customer? Is there a diminishing rate of return on customer access?
Getting close to the customer was the thought child of desiring to optimize every selling opportunity one can. Proximity and consistency have long been determined as the desired source to offer “dependable” products. This plays on the impulse side of the buying process without recognizing the power of the brand and the service that must also be maintained. In summary, proximity is merely one parameter in the decision-making process.
Market saturation is a term frequently used in conversation to define the impression where product is too available and as a result loses its appeal. Analytically, this is defined as the point at which a market is no longer generating new demand for a firm’s products due to competition, decreased need, obsolescence, or some other factor. The colloquial definition translated the minimization of demand interest to a price reduction.
The simplest way to analytically compute it is:
Figure 1: Expressed in Terms of a Percent
Defining the total potential customers requires one to take an honest assessment of the market size. Failing to recognize the total size to the market will put the blinders on your assessment of your shortcomings and things you can do to “capture” their demand.
Drivers of Behavior
What really drives customer consumption behavior? If proximity is the key driver, why is Mattress Firm struggling under the weight of their stores which are conveniently located to their customers. It strikes me that proximity is critical in few conditions:
- Base Commodity (food)
- Health Requirement (e.g. medicine, hospital, etc.)
- Fashion Risk (i.e. local desires and access)
- Everyday Consumables (e.g. paper, tissues, etc.)
Outside of these base requirements, store location is a luxury. It is the interaction and socialization factors that makes brick and mortar attractive. Leveraging this factor is critical to creating a “friendly” or appealing environment from which your customers want to visit.
The “local” purveyor will survive in tomorrow’s world if he/she leverages the localization of selection and really knows their customers interests and appetite. This will take us back in time to a world where the local mercantile catered to their market as a partner and friend rather than a pure profit generating store front.
Psychological of Buying
While we believe we are altruistically independent in our actions and behaviors, behavioral scientists tell us we are social purchasers that are influenced significantly by our environment and our peer group. Recognizing the impulsive nature of decision making helps one to recognize the influence one can have in closing the deal. At its core, people like to buy and in deciding to buy can be influenced through the “thrill of the hunt”.
People have a natural instinct to buy. Emotion plays a greater role in the decision than they want to admit. To cover up the impulsiveness of the process, most people justify their purchase using logic. They naturally rationalize the purchase through the uniqueness of the item, the help it will provide, and the leverage they can realize in its use.
While we like to shop, we also have a need to touch, feel, and try products before they are purchased. Often, today’s brick and mortar sellers fail to recognize this phenomenon in “sealing the deal” with insight and care. By recognizing the natural herd nature of the buying process, traditional retailers can capitalize on the process and enhance their sales.
Brining it Together
Combining the natural decision-making process of a consumer with the concept of market saturation helps us review our concepts of what really drivers a buyer’s decision. Drivers of market saturation is driven by more than supply availability, it is driven by:
- Alternatives: The uniqueness of the product offered and the availability of other items that can also be consumed with the same satisfaction to respond to the need/desire.
- Competitor Offering/Pricing: A factor a seller can use to drive interest is, pricing. If a competitor is “beating you to the punch” and offering a discounting strategy that undermines your pricing, this will impact your demand behavior.
- Market Recognition (brands that draw attention of their own accord): Some brands are desired and drive interest through their built-up good will and expectation of quality. Selling these brands can generate traffic of themselves and provide needed traffic to sell other items
- Customer Perception of the Brand: Like other brands you offer, your own business develops its own perception of quality and service. Managing your perception is critical to generating interest.
- Product Quality: Winning in the future will require ensuring that the products you sell have the level of quality to represent. Managing your vendors and the quality of goods sold is imperative to managing your brand.
- Fashion Availability: Product uniqueness and freshness is critical in driving everyday traffic to your store. Becoming a destination location ensures you will sustain demand.
- Price Point: When spending a large amount of money, customers want to touch, feel, and experience it before they are comfortable buying it. These “large purchase” items will take place at a destination retailer and the customer accepts the cost to find the store.
Does moving closer to the customer ensure increased sales? It does when the products and services you offer are unique, demanded, and perceived as adding value.
What if you could get the benefit of proximity and the efficiencies of centralization. Under this scenario, customer demand could be met through a localized experience and product delivered within the timeframe required. Providing a flexible supply chain solution that enhances customer perception is critical to optimizing the buyer psyche.
From a supply chain stand point, product can be efficiently and timely delivered by developing fulfillment centers within arm’s reach (i.e. same to two days) of the customer base. By doing so, you can respond to impulsive buyers quickly and remove the delay often experienced in an online retailer. Distributed logistics is invoking the power of the supply chain to provide efficient customer service.
How can the supply chain become a strategic selling solution for an organization, the answer is distributed logistics.
Customers demand a unique experience from the retailers they interact with. Delivering on their expectations is critical to developing a relationship with your customers where they believe their voice is being heard and catered to. Allowing yourself to become a dispensary of items is the death nail to failure. Proximity is important only when it adds value to the vendor-customer interaction. When the customer receives value that enhances the perception of the provider, this value counteracts the competitive pricing pressures. Failing to recognize the relationship one must create with their customers fails in recognizing the power of the relationship and the localization of demand.