What do defectors buy before they leave you?

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By: Wise Marketer Staff |

Posted on October 12, 2005

For local grocery stores, a good understanding of their customers holds the key to competing with mega-stores and discount giants such as Wal-Mart, according to research from the Tepper School of Business at Carnegie Mellon University.

The research conducted by Tepper School of Business suggests that small businesses can compete effectively by using their existing customer data to develop new sales and marketing strategies. The research also identifies several key characteristics of customers that tend to switch to a mega-retailer, allowing local retailers to more aggressively target those customers who are likely to defect.

The researchers analysed customer behaviour at a small-town supermarket on the USA's East Coast for a period of twenty months - before and after a Wal-Mart Supercentre opened two miles away. When the Wal-Mart centre opened, the local retailer lost more than 17% of sales volume, reflecting a US$250,000 monthly decline in revenue.

Smart loyalty data
Vishal Singh, assistant professor of marketing at the Tepper School and lead author of the research report, explained that the store's loyalty programme data was analysed for the study, representing more than 85% of transactions and more than 10,000 households. The data examined included the products purchased, the date and time of sales, and the geographic location of customer residences in relation to the store.

Singh's research confirmed what The Wise Marketer said in the current edition of its global report, The Loyalty Guide, saying: "We found that roughly 70% of the lost revenue was attributed to only 20% of the store's customers. We then looked to find out why customers defected and why some remained loyal. Armed with this information, retailers can make decisions about the types of products they carry and how to better price and promote them."

Real-life demonstration
In The Loyalty Guide a very appropriate example of Singh's suggested 'fight back with data' strategy is found:

One particular independent suburban grocer in the UK used this principle to change his whole business. He owned a small supermarket in a shopping precinct. He opened long hours, his range was limited, and he catered mainly for those who lived nearby and didn't have transport to get to a bigger supermarket. He also catered for quite a few more wealthy, mobile people who lived nearby and used to call in for top-up items and daily essentials. When he heard that a major EDLP (every day low pricing) supermarket had bought land across the street, he was dismayed. He estimated that he had around 12 months before they could open, so he targeted his wealthier customers. Whatever products they bought, he made sure that he stocked and expanded his ranges of related lines. What they never bought, he eliminated completely. Over the year, his inventory changed - and so did his customer base. The customers he lost were the poorer ones who would have migrated to the EDLP store anyway, while he cemented his relationship with his best customers. He even gained more of their friends by word of mouth. When the new store opened, he hardly felt the difference.

Source: The Loyalty Guide 2004/5 edition (section

Consumer types
By analysing purchase behaviour of customers who moved their purchases to the mega-retailer, the researchers found that typical defectors tended to be "large basket" consumers who were likely to have an infant and pet in the family. In addition, likely defectors tended to shop more on weekends and frequently bought lower-priced store brands rather than name brands. Singh noted that previous research has shown that store-brand buyers tend to be more price sensitive, reinforcing the obvious suggestion of why they would move to a mega-retailer that has economies of scale in its favour.

By contrast, those customers who were less likely to move their purchases to the mega-retailer tended to spend a large proportion of their grocery budget on fresh produce, seafood, and home meal replacement items (such as salad bars or ready-to-eat food selections).

Specifically, shoppers likely to defect to retail giants such as Wal-Mart were found to be those who buy large quantities of: diapers (baby nappies), baby food, dog/cat food, and cat litter. Those less likely to defect tend to buy: fresh produce, fresh seafood, specialty or custom-cut meat, and home-meal replacements.

Tactics to employ
Singh also found that geographic proximity to the local grocer had little impact on whether a customer was likely to defect. In fact, the majority of losses at the local store were due to fewer store visits by the group of key customers, but actual basket size (the amount of goods purchased) remained relatively similar if those customers could be lured back to the store. Singh therefore argues that the limited impact on overall basket size suggests that retailers would benefit from focusing on specific sales and marketing tactics that bring these customer back into their store.

Beyond weekly circular specials or in-store events, other such tactics could include select competitive pricing on the key items that draw defectors to the mega-store (even at the risk of cutting into individual product margins) in order to drive store traffic. Because these customers return with comparable purchase levels, they would help mitigate or overcome the overall volume of sales that was lost.

Small but deadly?
According to Singh, many small businesses assume they are doomed when a big box competitor opens its doors in their area. But because new mega-store openings are usually known in advance, local retailers have a great opportunity to use their existing customer data to identify likely defectors and take pre-emptive action.

According to Singh: "In many cases, local retailers already possess all the information they need to be potent competitors. The challenge is to figure out how to best use this data to improve performance and compete effectively."

The study
The study, entitled 'Impact of Wal-Mart Supercentre on a Traditional Supermarket', will appear in a forthcoming edition of Marketing Science, and was co-authored by Karsten T. Hansen and Robert C. Blattberg of the Kellogg School of Management at Northwestern University.

For details of how The Wise Marketer's 473-page global report, The Loyalty Guide, can help retailers compete, differentiate, and not only retain but win back customers, see the free executive summary, sample chapters, text search 'inside the guide', and table of contents at www.TheLoyaltyGuide.com.

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