Many retailers are already aware that most of their profits come from one group of their customers, and that some other customers are completely unprofitable. But how many are aware of the actual scale of this phenomenon?
The difference in contribution to profit is caused by several factors; many of them already well known to forward thinking retailers. Better customers visit the store more often, they spend more on each visit, their purchases are spread over more departments, they are more loyal and don't defect as often, their processing costs are lower and they 'cherry pick' less.
That list, with variations, has been so frequently quoted in books and conference presentations that many retailers must know it by heart. But the 'cherry picking' bit is always last, seemingly tacked on the end as an afterthought. Does it really make that much difference to the profitability of customer groups?
Research carried out by Gary Hawkins, president of the US-based consulting firm Hawkins Strategic has revealed quite how serious this phenomenon can be, as reported in his new book, Customer Intelligence (see our review). According to Hawkins, the common practice for decades has been to report sales net of markdown, that is, what the customer actually pays after any price reduction on the item. And, by not tracking the cost of the price reductions on their profit and loss accounts, retailers were oblivious to what amounts to a substantial marketing cost. Many modern POS systems can now report the true (gross) sales and the price reduction separately, so the reduction can then be treated as the marketing expense that it really is.
Using data from an actual supermarket company and dividing the customers into ten deciles based on their total spend per year, Hawkins calculated the specific markdown (or discount) dollars that each decile of the customer base received, and then calculated each of these as a percentage of the total markdown cost of the retailer: