Dec 7, 2005

Try this: increase profits by pampering best customers … and firing undesirable customers

Best Buy’s strategy to get rid of undesirable customers and pamper their best customers appears to be working. The share price of the No.1 consumer electronics retailer in North America has gone from a low of around $30 in the summer of 2004, when Best Buy began working on their customer-centric strategy, to a high today of around $50. That’s a 67% increase in 18 months.

Best Buy lavishes extra services on the top customers that generate most of the profits. Employees have been trained to identify customers belonging to specific buyer categories, chat with them and walk them through the sales process. Then there is the Geek Squad, a team of technical problem solvers within the store and who also make house calls. And here is the one that I like the most: three Best Buys in the Washington area are being transformed to attract high-income men, featuring leather couches where one might imagine enjoying a drink and a cigar while watching a large-screen TV hooked up to a high-end sound system. Now doesn’t that sound like a great shopping experience?

Around a year ago, Best Buy attracted a lot of attention by announcing plans to get rid of unprofitable customers. They want to discourage customers that abusively return merchandise, for example by buying products, applying for rebates, returning the purchases, then buying them back at returned-goods discounts. They also want to drive out customers that bring in rock-bottom price quotes from Web sites and demand that Best Buy make good on its lowest-price pledge. The company estimates that 20% of their 500 million customer visits each year are undesirable. These customers wipe out the profits generated by the best customers in the top 20%. So getting rid of them should have a direct impact on profits.

To discourage returns abuse, Best Buy began charging a restocking fee of 15% on returned merchandise. Now other retailers, including Circuit City and Sears, also charge a restocking fee. Some stores require photo identification to complete a return, even if the customer has a receipt and price tags are still on the item. At some retailers, personal information - including name, address and phone number - is automatically put into a database so when an abusive returner is identified, the clerk can refuse to accept the transaction.

Tougher return policies that apply to all customers, the majority of whom are not involved in returns fraud or abuse, are not really the best way to build loyalty. The estimates I have seen suggest that not more than 8% of returns are abusive. But retailers are fighting lower profits than in the past. The industry is more competitive today and companies have to do what they can to avoid unnecessary markdowns.

Tracking a customer in a database using personal information is considered intrusive by a growing number of people, what with fears of identity theft, big brother, etc. At Welcome, we are working on new payment technology which tracks returns through the EMV chip that is becoming ubiquitous on credit and debit cards in many parts of the world. Through this technology, banks can offer retailers a more convenient and less intrusive method to deal with returns. The return information is entered into a payment terminal, the customer’s card is inserted, and the return is accepted in the vast majority of situations, without needing to request additional ID or looking up the customer’s return history in a database.

Customers that have a new generation card with these capabilities will not need to go through the more cumbersome process that all other customers are subjected to. Plus, banks get additional benefit from the goodwill that comes from helping retailers solve major problems. This is all part of making the payment experience more pleasant and convenient. This is not about loyalty. It is about developing technology that makes payment with plastic much more attractive than any other payment method.

Click here for an earlier post on returns fraud.


WL said...

The concept of a "funnel" is not new. We apply it to the sales process to weed out high-cost low-return prospects. We apply the "funnel" principle to customer management as well. The 20-80 rule is the guiding principle behind "funneling". Let's spend 80% of resources on 20% of the "best" customers. (And this is true whether the retailer objective is driven by quantum, margin, or even market share).

The age-old adage of "customers are always right" and is quite wrong.

Anonymous said...

I recently completed a bit of research regarding return fraud, specifically focusing on methods to prevent it. The customer tracking may work for now, but there are already consumer groups that have aligned against it. I suspect that it'll become a free speech/identify theft issue eventually, depending on how fast the big retailers are to adopt it.