A couple of weeks ago I was talking to a technology company sales executive, who at the time was trying to make the case that retailers needed to do a better job of managing their cost to serve. Basically, if a shopper engages with a retailer in, for example, the store channel, the retailer should be doing everything in their power to incent the customer to stay in that channel and not use any others, because the more channels a customer uses, the more expensive the transaction is.
This executive highlighted banks as an example – that retail was just like the banking industry in this way, except retail was too immature to recognize that it has been getting itself tied up in knots trying to serve the customer however she wants to be served, instead of just incenting her to engage with them in the cheapest channel possible.
I certainly had never heard anyone in the retail industry espouse such a radical idea – just get customers to engage with you in the cheapest possible fashion. I confess, the idea bothered me. But in the moment, I couldn’t do more than walk away with the feeling of “This is wrong.”
I didn’t want my reaction to be one that came from the idea that “retail is different” and therefore the banking experience did not apply. I think retail as an industry tends to be incredibly shortsighted in claiming its uniqueness as a justification for dismissing things to be learned from other industries.
On the other hand, retail IS different. And not recognizing those differences, acknowledging them, and speaking to them, is what rapidly trips up – and limits – the success of technology companies in retail, especially when they are technology companies that serve multiple industries, of which retail is just one.
But still, that thought – retail must incent customers to engage through the cheapest channels possible – bothered me. It bothered me because retailers definitely are not pursuing this strategy. Instead, they are (whether they want to make the investments or not) building out presences across more and more touchpoints in order to engage with consumers however they want to engage, even if that means trips across multiple touchpoints in order to capture a sale.
I’m not the smartest person in all of retail – I have to think that other people have already considered this issue, and yet I can’t think of a single retailer that has taken on a strategy of minimizing engagement costs. Not a single one. So, it made me wonder why that is. What has prevented retailers from considering ways to minimize engagement costs across channels?
I finally came to an answer, just this last week. It comes down to switching costs.
The retail industry, structurally, is weaker than the banking industry. There are almost no switching costs in retail. Sure, the loyalty program. Sure, the familiarity with a retailer’s assortment that makes buying faster and easier. But compared to banks, that’s a pittance. Just consider for a moment what it would take for you to switch banks. How much pain – switching costs – you would have to endure to shift your loyalty to another bank. I’ve had to do it twice in my life, after moving to Texas and then back to Colorado, and if I never have to deal with that again, I will consider myself lucky.
Why do switching costs matter? Because my bank could close down my local branch tomorrow, paste a sign on the door that says “Visit our website” and there’s not much I would do about it. I wouldn’t be happy, but it would not be enough to make me move my business to another bank.
But if a retailer – honestly, any retailer, even one I loved – did something to make my life painful or inconvenient, I would drop them like a hot rock, and I think most other people would too. It’s just too easy to find the same products elsewhere, and even when the product is unique, it’s not so unique that a replacement can’t be found.
The idea that retailers can incent consumers to stay in one channel, or that they can be incented to move to the lowest cost-to-serve channel is a risky one. If it was truly an incentive – an offer – then retailers are giving away in margin what they would’ve had to spend on supporting other channels. If the incentive is a negative one (I’m making it less convenient for you to use this channel so that you’ll use the lower cost one that I want you to use), retailers are seriously risking those customers’ continuing business.
Retail, even food retail, is just not so critical of a life need and (with the exception of people living in food deserts, which is not a good thing at all) there are just so many other options out there. The switching costs are simply too low.
It would be healthy for retailers to understand their cost to serve, and where it is expensive and where it is cheap. I think retailers have a general gut-level feel for these things, but they may very well be operating under some corporate myths about cost to serve. But retail’s relationship with consumers, in the end, is just too fragile for them to have a lot of influence over how those consumers choose to engage with them. That’s what omni-channel has been all about from the beginning – the shift of control from brands and retailers to consumers who use technology to increasingly dictate the terms of engagement.
If retailers want to be successful in that environment, they need to be where their shoppers are, and if that is every single channel under the sun, that’s just how it’s going to have to be. What will make the difference between Winners and laggards in this environment is how well they can adapt to these new sources of costs – and, if they do it right, revenues.
