The holidays are always about selling as much merchandise as possible, but marketing professor Peter Fader explains why retailers need to focus on consumer behavior analysis and pay attention to customers year-round. This episode is part of a series on “Holiday Retail.”
Why Are Companies Neglecting Consumer Behavior Analysis?
Dan Loney: You’ve talked so much about customer centricity, and it feels like more companies understand the importance of that relationship between them and the consumer. Have we achieved almost total buy-in right now?
Peter Fader: No, not even close. We have a conceptual understanding that the real unit of the analysis should be the customer, not necessarily the product. People kind of are on board with that. But executing it, building your organization around it, being held accountable by it? Nah. There’s still a way to go. We’ve made great progress over the 10 or so years, and I think it’s even accelerating. But there’s still a lot to be done.
Loney: When you think about retail and this holiday season, how important is customer centricity. It’s a three-month window, but it’s been lengthened by so many retailers in the last few years.
Fader: You’ve hit the nail on the head. I’ve talked to all these companies, and they want to talk about customer centricity and lifetime value and customer retention and all that sort of thing. And then the conversations stop right around now. Literally this morning, I’m talking to a big retailer and they’re talking about some kind of lifetime value initiative. And they said, “We’ve got to put that on hold. It’s the holidays.” And I’m saying, “Well, wait a minute. This is the time to really be doubling down on it. This is the time that you really want to figure out who your best customers are, leverage that, and let that drive your strategy.” “No, no, no. This is the holidays. We’ve got to focus on just selling a lot of stuff, regardless of who’s buying it.” It’s that kind of frustration, this kind of conversation that proves that there’s still a lot of work to be done.
Loney: Is it because they are so busy, so stressed? Many companies really believe this is the time that will make or break them in terms of the numbers for the year.
Fader: One hundred percent. They’ve got to just push a lot of stuff out there. They’ve got to do it quickly; they’ve got to do it cheaply. And they really are taking their eyes off the ball, in terms of both who’s doing that buying, and what are the longer-term implications of the way that they’re building, or even ignoring, different kinds of relationships?
Loney: What do you think is the impact of not having that focus?
Fader: Well, we’ve seen it. In my newest book, The Customer-Base Audit, we say, “What’s the difference between the customers acquired during Q4, versus customers acquired through the rest of the year?” You have this great big bump. They buy a lot of stuff during Q4. They look terrific. But then you watch them over the longer term, they’re not as good. They don’t buy as often through the year. Yeah, they’ll come back and buy again a year from now, but only when stuff is on sale. So, you’re acquiring a less valuable group of customers during these times, and you’re paying a lot of money to do it.
I’m not saying that holiday marketing is a bad thing. You do have to push a lot of stuff out the door. But you should be doing it mindful of, who are these customers? And how can we tip it a little bit more towards the kinds of customers who will bring us lasting value? That’s a bridge too far, for a lot of retailers.
Consumer Behavior Analysis Is Essential, Especially When Things Go Wrong
Loney: How did the pandemic factor into this relationship between the customer and the retailer? Were there elements that changed or were tweaked during that time?
Fader: We really saw huge changes to holiday buying during the pandemic. We saw, basically, the disappearance of Black Friday and all that for a while. I went on record — wrongly — saying that this is going to change forever. This is going to be the wake-up call that a lot of companies needed to realize that this isn’t so good, and we should really be trying to smooth things out. Again, to the extent that we’re doing some heavy-duty activity during the holiday season, we should be doing it with our best customers in mind. Well, that appears to have all gone out the window. All indications are, we’re right back to where we were in December or fall of 2019, where it’s just, let’s push stuff out. We’ll deal with which customer’s which when January comes around. I don’t think we’ve made any progress.
Loney: How is inflation factoring into the relationship?
Fader: It should factor, and certainly it is factoring into the way the retailers are staging their plans. It’s going to be inflation. It’s going to be other kinds of economic uncertainties. We’re just going to see some tactical differences. But the spirit of the retail holiday season will be pretty much the same. It’s going to be doorbuster sales, let’s just get all that stuff out there. Let’s hope that it salvages the year for it. Maybe I’m wrong, and maybe we’ll see some companies going against the traditional grain of holiday marketing. But the early indications are that we’re right back to where we were.
Loney: Technology has played a big role with retail and e-commerce, and now we are factoring AI into so many aspects of business. Are we still in a time where we’re learning where that place is going to be, in terms of retail?
Fader: Totally, and that’s very exciting. My prediction for what we’ll see through the holiday season is using AI to do the things that we were going do anyway, but to do them a little bit more effectively, a little bit more efficiently. Whether it’s using AI to design the kinds of products that we’re going to be selling, to fine-tune the messaging, to help improve some of the supply chain aspects. It’s just going to be woven into the things that we do, and maybe that’s all it should be.
But I think we might see more substantial changes in the years ahead as not just retailers, but as all managers find more dramatic ways to deploy it, to do things that we just wouldn’t have been capable of doing before. We’ll see some slightly different operational changes. To the extent that we can use AI in the playbook, we’ll see that. But we’re not going to see anything really, really bold with it until we rewrite the playbook, which is something that sorely needs to be done.
Loney: You’ve talked in the past with me about that relationship between customer and retailer, and when something goes wrong. Does that dynamic change even more to the downside during this holiday retail season?
Fader: Sure. There’s a couple of factors going on, and one would be the economic uncertainty. We really have to protect ourselves from the downside. And the other would be just a lot of the backlash that retailers have been seeing. Whether it’s related to different kinds of [activism] and so on, I think a lot of retailers are just more worried about saying something, doing something that could just open up some kind of trap door. They’re going to play it a little bit safer in these terms, and understandably so. I kind of wish that we’d see bolder moves as far as what retailers were proposing to do and how they did it. But right now, it’s play-it-safe time.
Loney: It seems like that’s part of a greater focus on a company’s brand right now. That they are so concerned that brand is as pristine as it can be so that they don’t have any negative impacts.
Fader: That’s right. It’s the brand itself, but it’s even kind of specific messaging. Companies don’t want to take chances right now. They want to be very, very careful about how they choose their words. We sometimes see some kind of edgy Christmas advertising or even different kinds of promotional campaigns. And we’re just not going to see a lot of them now because we’re just worried that someone might take that the wrong way. Let’s fall back on traditional values and traditional thinking. That’s great, but every now and again you’ll see a firm wanting to break out of the pack and do something to be able to say, “Whoa.” It’s nice to see that. But I don’t think we’re going to see much of it right now, for all the obvious reasons.
The Latest Trends in Retail Beyond the Holiday Season
Loney: There are a few other things I want to bring up, one being how companies think about returns. Companies really are focusing more and more on trying to lower the level of returns because that’s a cost to them.
Fader: That’s a big problem. It has been a Christmas issue. “I don’t want this. I’m going to return it. I’ll get something else.” But now we see it’s a 365-day-a-year issue, where, “I’m going to buy a pair of shoes. Well, I’m going to buy eight pairs of shoes to make sure I have the right color and size.” That’s become much more rule than exception these days. Companies are really, really struggling with it. The silver lining is that companies are kind of used to dealing with that now. During the holidays, it might happen at a slightly greater volume. Everything happens at a greater volume. But we need a solution for it. We need to come up with a way to create better incentives both for companies to put the right stuff out there — the right messaging, the right sizing — and for people to not abuse the system as much as they do now.
Loney: There are a couple of retailers out there that have kind of made it part of their brand because they accepted returns all the time. It didn’t cost you to send them back, and it was something that connected them with the consumer. But obviously that mindset is changing.
Fader: It takes us right back to customer centricity. I think we have to make tough decisions for which customers are we willing to have that very generous return policy, and for which customers it’s going to be take it or leave it, or pay a 10% restocking fee. The companies have to get smarter, they have to get bolder, they have to be more responsible around these kinds of behaviors. These are conversations that are just starting, and we’re seeing every now and again a little experiment that a company might be running. But we’re not seeing any broad application of this kind of returns-oriented discipline. I think we are going to start seeing that soon. But we’re not going to see it during the holiday season.
Loney: What’s been your reaction to the conversation in recent months around “shrink,” or theft and loss for retailers?
Fader: Oh, it’s real. There’s no question it’s getting a lot of publicity. I think it’s appropriate that it get publicity, because it’s a real problem. But it’s the nature of shrink. It’s no longer just a kid taking a comic book. It’s organized crime. It’s a real problem to the point where so many stores are closing down. It has to be dealt with. What’s going to be interesting is to see if it gets worse, or if it gets mitigated during the holiday season. It might be that there’s just so many extra employees in the store, so much traffic in the stores. It’s just harder to see that kind of thing going on.
On the other hand, that might provide cover for some of that nefarious activity to take place. It’s hard to tell. But a problem may be even bigger than the returns problem, where we’re not at an equilibrium with it. It’s just a real, real issue. And we’d better be in a better place with it a year from now. Otherwise, it could really drag down the whole retail sector.
Loney: What are the themes for retail during this holiday season?
Fader: Again, there’s the prediction of what’s going to happen, and there’s what I wish would happen. The main theme is, let’s just sell a lot of stuff. Let’s get those big boxes out of here. Let’s turn from red to black. It’s the usual narrative. I think that will be the overwhelming theme. Maybe there’s something good about it. Maybe if companies are missing the opportunity to be more customer-centric, missing the opportunity to use their data to make better decisions that will lead to better long-run outcomes.
On the other hand, there’s something about, indeed, putting all that aside. Let’s just have Christmas in a traditional way. Let’s enjoy the holiday season, and then we’ll get back to work on January 1st and then hopefully make 2024 not only a better year, but a smarter year, as we use data, as we understand our customers and run our businesses more effectively.