Home » Artificial Intelligence » Algorithms and Targeted Marketing, Part 2

Algorithms and Targeted Marketing, Part 2

September 25, 2012

supplu-chain

“Increasingly, the largest retailers in markets across the country are employing sophisticated personalized marketing,” writes Gary Hawkins, CEO of Hawkins Strategic. [“Will Big Data Kill All But the Biggest Retailers?Harvard Business Review, 18 September 2012] As I noted in Part 1 of this series, Hawkins is writing about what could be “the next big thing” in marketing. Through personalized marketing (often called targeted or algorithmic marketing), Hawkins believes that large retailers are “becoming the primary shopping destination for a growing number of consumers.” Unless “other retailers in those markets” also find a way to employ targeted marketing, he fears they will be “relegated to the role of convenience stores.” Hawkins isn’t alone in his assessment. McKinsey & Company analysts Gunjan Soni, Joshua Goff, and Paul McInerney claim, “A massively disruptive transformation is taking place at leading companies, a disruption that could rewrite the entire traditional marketing canon.” [“By the numbers: Unleashing the power of algorithmic marketing,” McKinsey & Company, May 2012] They describe algorithmic marketing as “a new, scientific form of marketing.”

 

I agree with Hawkins, Soni, Goff, and McInerney that targeted marketing represents the future of retailing. That is why my company, Enterra Solutions, is working with clients to find the most innovative and cutting-edge ways to implement personalized marketing. Hawkins writes, “In this war for customers, the ammunition is data — and lots of it.” He explains:

“It began with transaction data and shopper data, which remain central. Now, however, they are being augmented by demographic data, in-store video monitoring, mobile-based location data from inside and outside the store, real-time social media feeds, third-party data appends, weather, and more. Retail has entered the era of Big Data.”

It should be apparent from Hawkins list of data sources that integrating disparate types of data is going to be one of the fundamental challenges that face organizations trying to make sense of it. The next challenge is displaying the insights obtained in a way that makes them easy to understand for those who must act upon them. Hawkins continues:

“Virtually every retailer recognizes the advantages that come with better customer intelligence. A McKinsey study released in May 2011 stated that, by using Big Data to the fullest, retailers stood to increase their operating margins by up to 60% — this, in an industry where net profit margins are often less than 2%. The biggest retailers are investing accordingly. dunnhumby, the analytics consultancy partnered with Kroger in the US market, employs upwards of 120 data analysts focused on Kroger alone.”

Enterra is working on an approach that will help companies like Kroger reduce analyst costs while significantly improving the latency of the information they act upon. As you can imagine, employing 120 data analysts can become very costly. Hawkins notes that “not every retailer … has the resources to keep up with sophisticated use of data.” That is why he believes that large retailers will eventually gain an edge over their smaller competitors. He continues:

“Within the industry, the term used for this new form of advantage is shopper marketing, loosely defined as using strategic insights into shopper behavior to influence individual customers on their paths to purchase — and it is an advantage being bankrolled by consumer goods manufacturers’ marketing funds. A recently released study [pdf] by the Grocery Manufacturers Association (GMA) estimates annual industry spending on shopper marketing at over $50 billion, and growing.”

GMA’s figures are more generous than Accenture’s. As I noted in yesterday’s post, earlier this year, Marianne Timmons, a Senior Principal at Accenture, told attendees at the Grocery Manufacturers Association (GMA) Executive Conference in Colorado Springs, CO, that less than five percent of the $200 billion spent on consumer packaged goods (CPG) marketing is targeted. The GMA figure represents about 25 percent of that amount. One thing that everyone seems to agree upon is that targeted marketing is going to garner a larger share of marketing funds in the future. Hawkins continues:

“The growth in shopper marketing budgets comes as manufacturers are reducing the spending on traditional trade promotion that has historically powered independent retail marketing. Past retail battles were fought with mass promotions that caused widespread collateral damage, often at expense to the retailer’s own margins. Today’s data sophistication enables surgical strikes aimed at specific shoppers and specific product purchases. A customer-intelligent retailer can mine its data searching for shoppers who have purchasing ‘gaps of opportunity,’ such as the regular shopper who is not purchasing paper products, and targeting such customers with specific promotions to encourage them to add those items to their baskets next time they’re in the store.”

Ideally, of course, both manufacturers and retailers would like to entice customers to purchase products without having to discount them. Targeted marketing holds this potential by exposing customers to products that fit with their lifestyles and tastes. Hawkins continues:

“A 2012 study by Kantar Retail shows manufacturer spending on trade promotion, measured as a percentage of gross sales, at the lowest level since 1999. But even this does not tell the whole story; it is the changing mix of manufacturer marketing expenditures that shows what is occurring. Trade promotion accounted for 44% of total marketing expenditures by manufacturers in 2011, lower than any other year in the past decade. This decrease is driven by a corresponding increase in shopper marketing expenditures.”

One thing that may have convinced manufacturers and retailers that promotions (especially coupons) were not as effective as they hoped (in fact, could be injurious to profits) was the rise of super-couponing. Super-couponing results in a small number of consumers hoarding large amounts of greatly reduced products. This is exactly the opposite result that manufacturers and retailers want to achieve. Hawkins continues:

“As shopper marketing budgets have exploded, the perception has taken hold within the industry that a disproportionately large share of that funding is directed to the very largest retailers. That’s not surprising when you consider what Matthew Boyle of CNN Money reported recently. He noted that the partnership of Kroger and and dunnhumby ‘is generating millions in revenue by selling Kroger’s shopper data to consumer goods giants … 60 clients in all, 40% of which are Fortune 500 firms.’ It is widely understood that Kroger is realizing over $100 million annually in incremental revenue from these efforts.”

Is it any wonder that earlier this year the World Economic Forum declared data a new class of economic asset, like currency or gold? Hawkins notes that the Kantar Retail report goes on to say:

“Manufacturers anticipate that changes in the next three years will revolve around continued trade integration with Shopper Marketing to maximize value in the face of continued margin demands. Manufacturers, in particular, expect to allocate trade funds more strategically in the future, as they shift to a ‘pay for performance’ approach and more closely measure program and retailer performance.”

In the big scheme of things, manufacturers and retailers are on the same team. They need each other to make a profit and stay in business. That is why, as Hawkins reports, “The future success model will involve deeper and more extensive collaboration between the retailer and brand, with focus on clear objectives and performance accountability.” That’s another reason that he worries that smaller retailers will be pushed aside by bigger retailers. Manufacturers are going to favor outlets that can sell the greatest volume of merchandise to consumers. He explains:

“It’s simply much easier for the brands to execute by deploying entire teams of people against a Safeway or Target or Walmart. It is much harder to interact with hundreds or thousands of independent retailers. Manufacturers’ past model of reaching independent retailers via wholesalers, who aggregated smaller merchants for marketing purposes, worked well in an age of mass promotion but not in an age of shopper-specific marketing. Wholesalers do not have shopper data, and do not have sophisticated technologies or expertise in mining the data. Meanwhile, they have a challenging record of promotion compliance, and in many cases lack the requisite scale for deep collaboration with brands.”

Hawkins sees “deep collaboration” as a driving force of the future and a prerequisite for personalized marketing. He asserts, “Personalized marketing is proving to be a powerful tool, driving increased basket size, increased shopping visits, and increased retention over time.” He also notes that “independent retailers are keenly aware of the competitive threat and desperately want to engage, but they have not had the tools or scale to do so.” Hawkins goes on to state that, just because a new age of deep collaboration between manufacturers and retailers is emerging, it doesn’t mean that this marriage of convenience is without its challenges. He explains:

“For everyone but those very large retailers, the present state of affairs is unsatisfactory. The brand manufacturers are frustrated by increasing dependence on the very largest retailers even as they cave in to their inability to effectively and efficiently collaborate with a significant portion of the retail industry.”

That is why Hawkins concludes that the “traditional business model for marketing interaction with the independent retail sector is ripe for disruption.” He concludes:

“Growing consumer expectation for relevant marketing, the potential for gain if customer intelligence could be brought to the independent sector, and desire to mitigate the growing power of the largest retailers all provide powerful incentive to brand manufacturers. Independent retailers are savvy operators and are eager to join the fray if given the opportunity. Conversely, maintaining the status quo means the largest retailers continue to leverage personalized marketing to outpace smaller retailers, threatening the very diversity of the retail industry.”

As companies like Enterra Solutions® continue to work on analytical techniques that will sharply reduce the time and money needed to support targeted marketing, the prospects that small- and medium-sized businesses will be able to take advantage of “the next big thing” in marketing will increase. That’s why I’m more optimistic about the future of retailing than Hawkins seems to be. I think Hawkins is correct that manufacturers will welcome any breakthrough that will help them support all available outlets for their products.

Related Posts:

Full Logo

Thanks!

One of our team members will reach out shortly and we will help make your business brilliant!