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Industry Insights
The potential of retail analytics
Businesses striving for long-term growth should consider their industry, size and customer base.
by Thomas H. Davenport
In order to drive sales and profits, many retailers are turning to a broad set of powerful analytical tools to enhance their competitive advantage. Leading organizations are using tools such as pricing and assortment optimization, location analytics, and customer-driven marketing to achieve dramatic benefits.
Yet many retailers struggle to prioritize their analytical approaches. Some companies are overwhelmed by the large number of options, while others find it difficult to digest all of the data provided by various point-of-sale systems, Web sites and internal transaction processes. A lack of skilled analysts needed to deploy the intelligence collected can also hamper progress.
For part of a recent research project, my team conducted interviews with 33 retailers and more than 25 retail and analytics experts to better understand how these organizations are using analytical tools and how using them affects their businesses. The resulting report, “Realizing the Potential of Retail Analytics,” identifies 18 critical trends—a wide-ranging collection of analytical approaches that successful retailers have employed to enhance their competitiveness. (See full list.) I will delve into the ones that reflect the current economic conditions, including those adopted mostly by small and mid-sized retailers.
Popular strategies
Before retailers can climb the ladder to success, they must first attract customers into their stores. Two complex approaches can help determine what type of store to open and where to open it, and the type of merchandise to sell and at what price. These are location analytics and real estate optimization. For instance, basing its product selection on area demographics and events, one large retail chain sold hunting merchandise during the hunting season and only in select stores. Other chains open stores where their particular goods would be best suited to the location. Applying these practices sets the stage for long-term, sustainable growth.
Knowing what goods to offer and in what quantities is another important factor for a successful business. By employing assortment optimization, retailers can make these determinations and even coordinate the product orders with manufacturers and distribution centers. While this can be complex, it can provide a nearly immediate payoff by reducing the number of discounted items and stockouts on the shelves.
A third type of analytics that helps deliver maximum benefit and create the fastest value is pricing optimization. Deploying an analytics initiative of this sort is a leading priority for retailers to determine the price for products and services at which customers are most likely to open their wallets.
Prioritize approaches
To successfully deploy analytics, retailers must choose the approach that best matches their branding, business strategy and operational capabilities. Low-cost retailers, for example, can drive value with supply chain and pricing analytics that focus on wringing costs from their systems. High-end companies that value long-term customer relationships tend to do better with customer-driven marketing and loyalty programs.
The next step is to determine which approach can deliver value most quickly. Budget-constrained companies often choose applications such as price optimization, promotion effectiveness, marketing mix allocation and labor force analytics because they can reduce costs and improve profitability quickly, with a relatively low investment.
How retailers prioritize their analytical projects also varies by industry. Online and catalog retailers already possess extensive customer data and knowledge. A popular catalog and brick-and-mortar retailer discovered through multi-channel analytics that its online promotions helped drive customers’ offline behavior. The results also detailed the preferred channel of communication for each of its customers. These resources can help retailers adopt customer-centric analytics approaches, such as providing next-best-offer information during Web site interactions.
Foundation for success
Regardless of the approach chosen, retailers must ensure that the prerequisites for effective analytical practices are addressed. Clean, high-quality, integrated and accessible data is essential to useful analytics. An enterprise data warehouse makes it easier to interrelate data across the organization.
For financially conscious mid-market retailers, hardware and software options are becoming far more affordable. Solutions such as data warehouse appliances and analytical software as a service are bringing sophisticated analytics capabilities to these companies at budget-friendly prices.
Additionally, having leaders who want to make fact-based decisions and executives who understand the importance of using these tools to support decision making is a critical success factor. When managers are passionate about these approaches, employees are more likely to explore the organization’s data assets and develop more analytical processes to achieve greater insight.
The road to precision retail
New options are available for retailers that want to build on their current analytics practices and for those that are lacking in the skills, knowledge or interest to operate in an analytics-driven environment. Many data and coupon providers offer analytics services for hire. Data warehouse and analytics vendors—such as Teradata and SAS—work with retailers, consulting firms and offshore providers to give their expertise. As these resources grow, retailers may create new analytical ecosystems to better meet their needs. In doing so, retailers must decide which analytics tasks they want to handle internally and which they should farm out.
And new technologies—such as video and customer sentiment analytics—as well as the more widespread use of radio frequency identification (RFID) data are coming. By combining these technologies with the industry’s growing analytical expertise, retailers can build a more integrated approach that will increase their insight and deliver enhanced value to the business.
Thomas H. Davenport is the President’s Distinguished Professor of Information Technology and Management at Babson College in Massachusetts and a noted expert and author in the field of analytics. In 2008, Davenport was listed among the top 100 Most Influential People in IT by the editors of eWeek, CIO Insight and Baseline.
Photo illustration by Randall Nelson