Competitive Advantage and Digital Transformation – Optimizing Retail and eCommerce

In my last posts before the DA Hub, I described the first two parts of an analytics driven digital transformation. The first part covered the foundational activities that help an organization understand digital and think and decide about it intelligently. Things like customer journey, 2-tiered segmentation, a comprehensive VoC system and a unified campaign measurement framework form the core of a great digital organization. Done well, they will transform the way your organization thinks about digital. But, of course, thinking isn’t enough. You don’t build culture by talking but by doing. In the beginning was the deed. That’s why my second post dealt with a whole set of techniques for making analytics a constant part of the organization’s processes. Experimentation driven by a comprehensive analytics-driven testing plan, attribution and mix modelling, analytic reporting, re-survey, and a regular cadence of analytics driven briefings make continuous improvement a reality. If you take this seriously and execute fully on these first two phases, you will be good at digital. That’s a promise.

But as powerful, transformative and important as these first two phases are, they still represent only a fraction of what you can achieve with analytics driven-transformation. The third phase of analytics driven transformation targets areas where analytics changes the way a business operates, prices its products, communicates with and supports its customers.

The third phase of digital transformation is unique. In some ways, it’s easier than the first two phases. It involves much less organization and cultural transformation. If you done those first two phases, you’re already there when it comes to having an analytics culture. On the other hand, in this third phase the analytics projects themselves are often MUCH more complex. This is where we tackle big hard problems. Problems that require big data, advanced statistical analysis, and serious imagination. Well, that’s the fun stuff. Seriously, if you’ve gotten through the first two phases of an analytics transformation successfully, doing the projects in Phase Three is like a taking a victory lap.

There isn’t one single blueprint for the third phase of an analytics driven transformation. The work that gets done in the first two phases is surprisingly similar almost regardless of the industry or specific business. I suppose it’s like laying the foundation for a building. No matter what the building looks like, the concrete block at the bottom is going to look pretty much the same. At this third level, however, we’re above the foundation and what you do will depend mightily on your specific business.

I know that it depends on your business is not much of an answer. As a consultant, it’s not unusual to get caught up in conversations like this:

“So how much would it cost?”

“Well, that depends.”

“What kind of things does it depend on?”

“Well, it depends on how deeply you want to go into it, who you want to have do it, and how you want to get it done.”

All of this is true, of course, but none of it is helpful. I usually try to short-circuit these conversations by presenting a couple of real world alternatives.

I think this is more helpful (though it’s also more dangerous). Similarly, when I present the third phase of an analytics driven transformation I try to make it specific to the business in question. And the more I know about the business, the more pointed, interesting, and – I hope – convincing that third phase is going to look. But if I haven’t spent much time a business, I still customize that third phase by industry – picking out high-level analytics projects that are broadly applicable to everyone in the sector.

That’s what I’m going to try to do here, with the added benefit of picking a couple different industries and showing how the differences play out in this third phase. Do keep in mind, though, that the description of this third phase – unlike that of the first two – is meant to be suggestive only. No real-world third phase (certainly no optimal one) is likely to mirror what I lay out here. It might not even be very close. What’s more, unlike the first phase (at least) which is close-ended (when you’ve done the projects I suggest you’re done with that phase), phase three is open-ended. You never stop doing analytics projects at this level. And that’s a good thing.

For the first example, I decided to start with a classic retail e-commerce view of the world. It’s a sector where we all have, at the very least, a consumer’s understanding of how it works. There are many, many possible projects to choose from, but here are five I often present as a typical starting point.

The first is an analytically driven personalization program. With journey-mapping, 2-tiered segmentation and a robust experimentation program, an enterprise should be a in a good position to drive personalization. Most personalization programs bootstrap themselves by starting with fairly straightforward segmentations (already done) and rule-based personalization decisions targeted to “easy” problems like email offers and returning visitors to the Website. That’s fine. The very best way to build a personalization program is organically – build it by doing it with increasing sophistication in more and more channels and at more and more touchpoints.

Merchandising optimization is another very big opportunity. So much of the merchandising optimization I see is focused on product detail pages. That’s fine as far as it goes, but it misses the much larger opportunity to optimize merchandising on search and aisle pages via analytics. Traditional merchandising folks have been slow to understand how critical moving merchandising upstream is to effective digital performance. This turns out to be analytically both very challenging and very rich.

Assortment optimization (and I might be just as likely to pick pricing or demand signals here) has long been a domain of traditional retail analytics. As such, I have to admit I didn’t think much about it until the last few years. But I’ve come to believe that digital analytics can yield powerful preference information that is typically missing in this analysis. To do effective assortment optimization, you need to understand customer’s potential replacement options. In the offline world, this usually involves making simple guesses based on high-level product sales about which products will be substituted. Using online view data, we can do much, much better. This is a case where digital analytics doesn’t so much replace an existing technique as deepen and enrich it with data heretofore undreamed of. Assortment optimization with digital data gives you highly segmented, localized data about product substitution preferences. It’s a lot better.

I’ve become a strong advocated for a fundamental re-think of loyalty programs based on the idea that surprise-based loyalty with no formal earning system is the future of rewards programs. The advantages of surprise-based loyalty are considerable when stacked up against traditional loyalty programs. You can target rewards where you think they will create lift. You can take advantage of inventory problems or opportunities. You don’t incur ANY financial obligations. You create no customer resentment or class issues. You can scale them and localize them to work with a specially trained staff. And, of course, the biggest bonus of all – you actually create far more impact per dollar spent. Surprise-based loyalty is, inherently, analytic. You can’t really do it any other way. Where it’s an option, it’s always one of the biggest changes you can make in the way your business works.

Finally, I’ve picked digital/store integration as my fifth project for analytics-led transformation. There are a number of different ways to take this. The drives between store and site are complex, important and fruitful. Optimizing those drives should be one of the analytics priorities for any omni-channel retail. And that optimization is a combination of testing and analytics. In this case, however, I’ve chosen to focus on measuring and optimizing digital in-store experiences. You’re surely familiar with endless-aisle retail; where digital is integrated into the in-store experience. The vast majority of these physical-digital experiences have been quite ineffective. Almost always, they’ve been executed from a retail perspective. By which I mean that they’ve been built once, dropped into the store, and left to fail. That’s just not doing it right. In-store experiences are getting more digital. Digital signage is growing rapidly. Physical-digital experiences are increasingly common. But if you want actual competitive advantage out of these experiences, you’d better tackle them from a digital test-and-learn/analytics perspective. Anything less is a prescription for failure.

Digital Transformation Phase III Retail

So here’s my first round of Phase Three projects for an analytics driven transformation in retail. Each is big, complex and hard. They are also important. These are the projects that will truly transform your digital business. They are rubber-meets-the-road stuff that drive competitive advantage. It would be a mistake to try and execute on projects like this without first creating a strong analytics foundation in the organization. You’re chances of misfiring on doing or operationalizing the analytics are simply too great without that foundation. But if you don’t move past the first two phases into analytics like this, you’re missing the big stuff. You can churn out lots of incremental improvement in digital without ever touching projects like these. Those incremental improvements aren’t nothing. They may be valuable enough to justify your time and money. But if that’s all you ever do, you’ll likely find yourself wondering if it was all really worth it. Do any of these projects successfully, and you’ll never ask that question again.

Next week I’ll show a different (non-retail) set of projects and break-down what the differences tell us about how to make analytics a strategic asset.

[Just a reminder that if you’re interested in the U.S. version of the Digital Analytics Hub you can register here!]