The Unrelenting Wave of Transparency

When RSR was founded, all four of us were already individually circling around the idea that a shift of tectonic proportions had just occurred in retail, and the industry was only beginning - at the time - to notice. What we saw, as early as 2003, was a move away from a product or cost orientation (the realms of category killers and channel masters) in retail to one focused on customers. My best summary came as: "Success is no longer defined by how you want to sell, but by how customers want to buy."

We explained the shift in terms of The Discipline of Market Leaders, a book by Michael Treacy and Fred Wiersema. The basic premise is that market leaders must specialize in one of three market disciplines - Product Leadership, Operational Excellence, or Customer Intimacy. The catch is that while your goal is to excel in one, you must still meet minimum expectations in the other two in order to be an effective market leader. Walmart, during its rise, slayed the market by pursuing operational excellence, and has (some would argue) faltered a bit in managing a market transition to customer intimacy (though the impact was dulled by a downturn that sent cascades of consumers into Walmart stores to save money).

Are these market disciplines now obsolete? While you could make an argument in support for continued interest and pursuit of customer intimacy, I do believe that transparency has rendered Treacy's and Wiersema's concept obsolete indeed. Here's why.

Operational Excellence. This market discipline is most often characterized as "low price leader." As Walmart exemplifies, if you can achieve scale and operational discipline, you can achieve prices that no one else can. However, in a world of mobile phones equipped with cameras and web access - and handy little apps like Save Benjis or Red Laser - operational excellence no longer provides you with a lock on low price leadership, especially on an item-by-item basis. While it is true that during the downturn people flocked to Walmart because as a destination, it promises lower prices than the competition, there has also been significant adoption by consumers of price comparison engines, both online at home and on their phones in the store. Such price transparency enables consumers to cherry-pick the best deals from whichever retailers want to try dangling the price lure on a specific product. You might risk that you don't get the follow-on sales, or the attachment-type sales that make a loss leader price strategy work, but a loss leader strategy does get you visibility in consumer product/price searches - you get a seat at a table that you might never have had before.

The challenge that transparency has brought to retailers which excel in operational excellence is how to manage the 'brutality' of a straight price comparison search. How do you convey the value of your excellent service? Your clean, easy to navigate stores? The fact that you have it when nobody else can necessarily promise that?  Guess what? You can't. At least, right now, when a third party comparison site does a product search, you either have to play on their terms or get excluded from the results. Either way, you may lose. And web-only retailers are getting increasingly savvy about how to end up on top of those results - whether driven through Amazon or through a comparison site. Software is helping them, by defining rules and algorithms that let retailers game these comparison systems - allowing them to strategically snatch the best result for a short time, or at least more closely manage the race to the bottom on price.

Product Leadership. When I talked about market disciplines, I tended to favor this particular discipline as the only real viable alternative out there to customer intimacy - because Walmart already owns operational excellence and there is not much that you can do there. I even got into an argument once with an IT guy from a clothing retailer who argued that his company competed very successfully with Walmart on price (the company is no longer in business), but while it is true that they had low prices, the company designed all of its own products exclusively - you couldn't get them anywhere else. And in fact, they made a lot of hay out of partnering with celebrities and the likes to create exclusive brand lines. Low prices or not, I'm sorry but that's a product leadership strategy. It just happened to be at the low end of the market.

The problem with product leadership comes on two sides. On the one side, there is Zazzle and Etsy - where it's no longer a question of who has the right products or the best products, but a question of how I can get my hands on a product that I designed, exclusively for me. Exclusivity is brought to the masses. On the other side, there is Gilt, where even though the business model is built on perpetuating exclusivity to some degree (invitation only, etc.), it's really all about designer closeouts for...the masses. While granted, I am continually amazed to watch people fill their Gilt shopping carts with $10,000 necklaces and the like - with as much of a frantic feel as a closeout day at Filene's Basement - it's still really just TJ Maxx or Ross at a high-end level - exclusivity, again, brought to the masses. In a way, this is the flip side of the price comparison problem. When you have a wide universe of product choices available at the click of a button, what value is there in product leadership? There's always going to be someone else who has something that's "like it" enough to be "good enough."

How do you compete with that? As a retailer that prides itself on assortment and having the hot products, how do you compete with "made just for you" or "affordable to you when it never was before"? You can't, really. But if you can't beat them, then join them. And that leads to customer intimacy - because in order to offer exclusivity, you need to know what facets of exclusivity your customers value most, and it's going to be different for different customers.

So, Customer Intimacy. This is the idea that you are going to win the hearts, minds, and wallets, of customers by knowing them better. By meeting their needs before they even realize they have needs. But here's my problem. I'm more than one customer. And I might even be two different customers to the same retailer on two different days, depending on what category I'm shopping. This is the Amazon problem - you buy one gift for a friend on Amazon one time, and the recommendations you get are influenced by that purchase for what seems like the rest of your life. Amazon knows me as a toy-loving connoisseur with a slightly contradictory taste for Alien Legos and Barbies, thanks to Christmas shopping. But I promise, I am so much more!

So how do you guard against that kind of thing happening with your own customers? Transparency. Let customers have control. Let them TELL you what they are interested in, or at least let them opt out of recommendations that they feel are not relevant to them. Let them train your optimization, rather than try to be all sneaky about figuring out what it is they want by watching the breadcrumbs they leave behind online and in stores.

So now what? Product leadership, operational excellence, and customer intimacy are all obsolete - what does that leave? Transparency. And control. Retailers, give up now. Give up control to consumers. Let them drive their choices about what is relevant to them. Let them decide which products you should carry, and help them understand the value of different parameters of operational excellence outside of price. This is turning your company inside out - dividing it up into pieces that customers pick up and assemble into the shopping experience that they want. This requires thinking about your enterprise and your channels and your marketing much differently than market discipline thinking.

Unless flexibility is the new, fourth discipline in retail.

This column is syndicated to Blue MauMau by Research Systems Research. For more insights and research on retailing trends, go to RSR