14 December 2017
9 Golden rules of global retail customer behaviour
Rambaut Fairley and James Walker
We have worked with many major retailers around the world analysing large amounts of customer data. While every business is unique, as are its customers, experience has taught us that certain common threads or golden rules will always be present. Drawing on our experience, we can set out some immutable laws of customer behaviour and what they mean for your business.
Every retailer will tell you they want ’to grow sales’ but normally without much clarity around how they would like to achieve this as this can be done numerous ways attracting more customers, increasing their frequency of purchase, growing their basket sizes, driving cross-shopping of new categories, etc…
These things are often treated as the product of my activities rather than their objective. It is important for retailers to de-average their data, set clear objectives that vary by customer-segment (e.g. whether it's a frequency or a basket size play they're chasing), and to recognise that they're engaged in a battle for share of wallet and they're always only a part of their customers' shopping repertoire.
To help achieve that, here are 9 golden rules of global retail that we are certain will hold true for your business as well:
1. Top 10% of customers account for 50% of sales
20% of customers will account for 75% of sales. Actually, 50% of customers will account for 95% of your sales. This is true for every retailer, in any category, in each country in the World. It's an inviolate rule, so turn it to your advantage and make sure you are listening carefully to your highest value customers.
2. Even for your top 10% customers, you only account for 50% of their spend in your category
You are playing your part in a repertoire game, even for your very best customers. To win when faced with a repertoire challenge, make sure you understand your customers’ missions and which ones they choose you for and why, i.e.: focus on what you're best at and keep improving at it.
3. The difference in value between the top 10% of customers and the next 10% is always frequency not basket size
Decile 1 are always twice the value of Decile 2, and this is entirely because these customers have twice the frequency. More frequency is always better than bigger baskets. "One more item in the basket" strategies work less well than "one more visit per month," simply because one more basket is worth massively more.
4. Across the bottom 50% of your customer base, differences in customer value all come from basket size rather than frequency
Frequency is already as low as it can go for these customers. Remember to adapt your strategies for different types of customers: for the shoppers who rarely purchase from you, one more item in the basket will help a bit, but increased frequency will lift them out of the bottom 50% entirely.
5. The overall ‘average’ (i.e. mean) frequency of visits across all your customers will dramatically mislead you
For example, a restaurant may think the ‘average’ customer visits every 5 weeks. But for the top decile of customers- who of course accounted for 50% sales - the interval was just 10 days. To understand customers, you must always de-average the data.
6. Online, large baskets are bought by frequent shoppers and small baskets by infrequent shoppers
There is a rock solid inverse relationship between average purchase interval and average basket size. So while offers that incentivise larger baskets are good for the economics, so too are offers that encourage a rapid return.
7. Behaviour in your first 90 days as a digital customer is a near perfect predictor of your lifetime customer behaviour
Extended intervals in your first few weeks as a customer predict ever-increasing intervals until the customer never comes back. However, if a customer transacts 3 times in the first 90 days they have a 90% chance of becoming a top decile customer for the long-term.
8. Your highest value customers use all of your channels, your lowest value customers are single channel customers
There's a set of linear relationships between Customer Lifetime Value, number of transactions, transaction value and number of channels used. It's a myth that there are valuable single channel, occasional buyers with large baskets. An omnichannel offer boosts Customer Lifetime Value.
9. Promotions make your worst customers even less profitable
It's a universal law of retail that the least valuable 50% of customers account for less than5% Sales but take over20% of the cost of promotions. There's a massive opportunity to realign investment in promotions away from your worst customers and reallocate that spend to support your best customers – but this will require a clear understanding of what those customers are motivated by and a set of promotional tools that cleverly target the right behaviours.
These 9 rules are truisms – to the enlightened they may even be obvious – they are true of your business today and they will remain true of your business tomorrow. Strategies that aim to violate these rules are destined to fail; it is only by embracing them, tailoring your approach to the different types of customer that you are targeting and being clear on the changes in behaviour that you are trying to deliver that you will achieve sustained success.
Rambaut Fairley, Partner
James Walker, Partner and Global Head of Analytics