April 25, 2005

Best Buy Proving Customer Centric Model

customer.jpegThe customer-centric strategy started last year at consumer electronics retailer Best Buy will be turned up in 2005, the company says. And in the process, it could change the entire competitive retail landscape.

From Peppers and Rogers Group

"Best Buy is having success maximizing the value of each consumer," says Gary Arlen, a veteran consumer electronics industry analyst. "It will change the way every other retailer does business now. The more its competition sees its success, the more are going to follow that customer-centric strategy. Get ready for the ripple effect."

In announcing that its 2005 earnings rose 17 percent over 2004, Best Buy gave high priority to the customer value groups it has identified and targeted as a key to its growth. At the end of 2004, 85 of its 830 U.S. stores operated under a customer-centric model in which it identified customer groups such as premium or high-ticket purchasers, early adopters, and small business owners as key groups from which to grow value and revenue. It also pays less attention to low-value customers who frequently return items or make relatively low-value purchases.

Those 85 stores, according to the company's April financial statement, booked average sales gains 8.4 percent last year, compared to 2.3 percent at "non-segmented" stores. "There's no turning back," said CEO Brad Anderson. The company will convert 150 to 200 more stores to the customer-centric model this year.

"Over time, we believe that our customer centricity work will help us attract new customer segments to our stores, which leverages our existing assets," Anderson said in a recent press release. "In addition, it gives us an engine for continuing to innovate and respond to changing customer needs."

Not only is Best Buy showing that creating customer groups and treating them differently can work, it is also putting the concept of customer value on the map for many retailers. The mass retailing world that has been based on aggressive discounting and mass market ad spending is now taking notice of Best Buys efficiency and success.

"It is doing what every retailer should do," says Judy Bayer, Ph.D., director of Advanced Business Analytics for Teradata. "It is identifying its hero customers. It is developing strategies for how to acquire those high-value customers, it is developing the behaviors it wants to see from its high-value customers and they are treating different customers differently."

And it may be starting to crack the case on how to compete successfully with Wal-Mart. The uber-retailer does not compete with Best Buy on its high-end plasma screen TVs or connectivity services such as satellite and cell phone service. But it definitely competes on price for CDs, video games and low-end electronics. Best Buy has chosen to let Wal-Mart have the low end. That's part of its success, but it has also beaten Wal-Mart at customer-centric retailing in this category.

"Best Buy has taken a phenomenal step forward. It has raised the bar for everyone," says Janice Mayo, Vertis SVP of Sales & Marketing, whose company has worked closely with many regional retailers to identify customer groups and customize interactions with them. "It is competing correctly with Wal-Mart because it is putting into practice the belief that at the end of the day you have your brand and your unique customer set. You can only really leverage one of those things. And it's the customer."

According to Anderson, all Best Buy stores will operate under the customer-centric model "within three years."

Posted by keefner at April 25, 2005 02:12 PM