The rise of retail's experience economy

A recent Wall Street Journal article bid farewell to the “Wal-Mart Era.” The piece, which highlights a significant shift in the industry, identifies three ways rivals are luring consumers away from the retail giant: greater convenience, larger selection and higher-quality service.

The bulk of Wal-Mart’s innovations in the past decade have focused on supply chain and efficiency improvements that ultimately served a single purpose: to drive down prices. Meanwhile, Wal-Mart competitors have more recently focused their innovations on a wider range of customer-facing enhancements. Customers are responding to the latter changes, and that has implications for consulting firms who serve the retail industry.

For instance, Best Buy’s Geek Squad conveniently installs new flat-screen televisions and entertainment systems in their customers’ homes. Zappos.com’s shoe inventory and Amazon.com’s selection of books (not to mention consumer electronics, health and beauty, and home and garden products) makes Wal-Mart’s shelf space look less than super-sized. Whole Foods and less swanky supermarkets offer recipe advice, tips from on-staff sommeliers and cooking classes from locally renowned chefs.

The growing importance of convenience, selection and service in the retail industry in North America and Western Europe reflects a larger embrace of customer experience management. This phrase relates to the approaches companies use to learn about customers. They then use the knowledge to encourage customers to spend more and spread the word. Loyalty, which typically measures the extent to which customers spread positive word about a company (a distinct metric from customer satisfaction), figures as a prominent objective of customer experience management. Loyalty also marks an increasingly important strategic objective, placing sixth (a shade behind profit growth and “finding qualified managerial talent”) on The Conference Board’s 2007 list of “Top CEO Challenges.”

Aware that competitors can almost always match their prices and products, retailers are hungry for new ways to differentiate themselves and boost loyalty.

In “HOW: Why HOW We Do Anything Means Everything...in Business (and in Life)” (John Wiley & Sons, 2007), CEO Dov Seidman discusses the opportunity for the retail industry to move away from a service mentality to focus on delivering authentic customer experiences. He describes customer service as a “what,” something that has become commoditized.

“In today’s world, our ‘whats’—products, services and processes—can be easily duplicated and reverse-engineered,” he says. “The retail industry has an opportunity to out-behave the competition by focusing on how they do what they do.”

Power to the People

To do so, retailers need to get to know what their customers want, in terms of products and experiences, and then deliver those needs. But, that’s easier said than done.

“Consumer expectations have accelerated rapidly over the past 10 years—like no other time in history, with no sign of a slow down in sight,” says Steve Ladwig, general manager, IBM retail store solutions. He also notes that consumers “are demanding even greater flexibility and choice.”

They can do that thanks to the power of information their fingertips increasingly wield. The same technology that fueled back-end retail advancements, like tighter supply chain integration, also equipped consumers with the devices and connectivity they need to learn about products, compare prices and consult with their own “demand networks” (i.e., friends and family members) to make savvier purchasing decisions.

One in 10 consumers reached out to friends or family during the 2006 holiday shopping season by using their cell phones to talk, text or send digital pictures while collecting input and sharing product information, according to an IBM survey.

“Customers are more empowered than ever before through access to information,” notes David Gruehn, U.S. industry solutions director for Microsoft’s retail and hospitality group.

That rings true in the beleaguered record industry where British band Radiohead ceded full authority of pricing decisions to fans. In October, the band let fans choose how much, if anything, to pay to download its newest album. Earlier this year, the artist known once again as Prince gave away more than 3 million copies of his album to fans in the U.K., where he chose not to sell a single copy. The massive giveaway strengthened brand loyalty and helped stoke Prince’s lucrative concert-ticket sales.

The music industry is not alone in contending with major challenges: 64 percent of survey respondents indicate that they are likely or very likely to switch or discontinue doing business with companies (in 10 different product and service categories) they currently patronize, according to an Accenture study entitled “Seller Beware: The Curse of the Disloyal Customer.”

Consumers’ newfound power also stems from their ability, and increasing willingness, to walk away from retailers when their experiences disappoint them. “They expect the same seamless experience in a store as they have at home,” Gruehn adds. “There isn’t necessarily a desire for loyalty anymore, and many consumers have taken a ‘What have you done for me lately?’ attitude.”

Too many of those expectations of a seamless experience remain unfilled, according to a new study (See “Cracks in Brick-and-Mortar Satisfaction”) from the University of Pennsylvania’s Wharton School of Business and The Verde Group, a consulting firm that helps companies measure the cost of customer dissatisfaction before prioritizing and fixing the sources of displeasure.

“The younger you are, the more problems you tend to experience,” notes The Verde Group CEO Paula Courtney. Eighteen- to 29-year-old shoppers are 66 percent more likely to experience problems in retail stores than shoppers who are older than 65, according to the survey. The most prominent complaints among 18- to 29-year old shoppers? Being ignored by staff; finding sales associates to be more interested in selling than offering genuine help; encountering employees with insufficient product knowledge; and failing to find items due to disorganized store layouts.

The Wharton-Verde Group study also identifies sales associate capabilities that, when present on the sales floor, can reduce the most damaging causes of customer dissatisfaction. One of those capabilities, authenticity, happens to be the title of a new book from James H. Gilmore and B. Joseph Pine, the team that previously wrote The Experience Economy and Mass Customization.

“Goods and services are no longer enough,” write Gilmore and Pine, whose new book provides organizational approaches to assessing and rendering authenticity. “What consumers want today are experiences—memorable events that engage them in an inherently personal way.