169-Retailers as the Source of Creativity

It seems that retailers are often on the leading edge when it comes to innovation and creativity in their crafting of their offerings. They have an excellent sense of how their customers think.

For example, a couple of years ago, McDonald’s instituted a product offering around the change that a customer was about to receive for his order. Software the company had purchased created a discount offering that allowed the customer to take another item for the change, or slightly less than the change, he was about to receive from his original order. A high proportion of customers accepted these offers. (See “Audio Tip #53: Setting Specific Company Objectives for Many Customers” on StrategyStreet.com) While the additional product was offered at a discount, it still increased the margin on the sale.

Family Dollar stores offer another example. This company has done very well over the last 18 months, despite the recession. In fact, consumers naturally turned to Family Dollar and other very low-priced stores during these difficult times when customer budgets are pressured. Family Dollar is not resting on its laurels. In fact, it is adjusting its offerings to fit its current customer needs. Their principal hope today is to retain the new customers it has attracted over the last 18 months. The company has found that customers are focusing on their needs, rather than their wants. So, Family Dollar has added more food items and reduced offerings of appliances and other home categories. The company is also trying to increase its share of its customers’ purchases. It hopes to increase the total purchases on each customer’s visit and to shift some of those additional purchases to higher margin items. (See “Audio Tip #60: Customer Segmentation by Needs” on StrategyStreet.com.)

It offers the following example of its marketing changes to increase sales: If the company advertises underwear and laundry detergent in its regular flyer, both items may increase proportionately in sales. However, the laundry detergent often brings with it additional purchases that would be used with the detergent, such as fabric softeners, bleach and paper towels. These latter additional items carry higher margins because they are not included in the regular flyer discount offerings. The company has found that sales containing laundry detergent advertised in the flyer were 14 times more likely to include fabric softener, which wasn’t advertised, than the average transaction.

Retailing has become a data-hungry industry, and the retailers have grown in their understanding of customer needs by mining that data to develop creative merchandizing innovations that help both their customers and their bottom lines.

Update:

McDonald’s and Family Dollar stores reduced their costs, increasing margins, by increasing the number of items sold in an average customer transaction. This action improved the companies’ Productivity through increasing efficiency.  Efficiency is the Input/Intermediate Cost Driver. The efficiency increased as the number of purchased items sold (ie., Purchases, one of the three major Building Block Costs) per cash register ring, an Intermediate Cost Driver increased.  See HERE and HERE for more explanation and HERE for more examples of increasing efficiency

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