Where did all the Shops go?

The decline of physical shopping experiences has been widely reported across many of the western markets. Consumers in the US and the UK admit to spending roughly 11 hours online each day, and globally around 35% of purchases are made online. This trend is even more evident within younger age groups, and as technology increasingly plays a bigger part in their lives so we should expect to see fewer retail experiences occurring in physical stores and more online. E-commerce continues to grow rapidly, expected to total $334 billion in 2015, and predicted to surge to $480 billion by 2019 according to Forrester Research. Over the past decade, US e-commerce has grown almost 18 percent a year, representing slightly less than 10 percent of total retail sales--some analysts predict a jump to 30 percent by2030. With the accelerating adoption of mobile--today nearly two-thirds of Americans own a smartphone--digital commerce is poised to explode, bringing further changes to retail shopping including a shrinking physical retail footprint. Sears has indicated that it would accelerate the number of store closings during this year, from 130 to 235. RadioShack, which is negotiating with lenders to gain approval to shutter 1,100 stores and has already closed 175 locations in 2014. The past four years has also seen the death of more than two dozen indoor malls, with another 60 hanging in the balance, according to data from Green Street Advisors as was first reported by The New York Times.

According to a Wall Street Journal article ("Shoppers Are Fleeing Physical Stores"), U.S. retailers are facing a steep and persistent drop in store traffic. Shopper visits have fallen by 5% or more from a year earlier in every month for the past two years, according to ShopperTrak, a Chicago-based data firm that records store visits for retailers using tracking devices installed at 40,000 U.S. outlets. Another article ("Where Have all the Shoppers Gone?", FORTUNE, September, 2014), suggests that retailers continue to face a "Darwinian struggle for survival", which will ultimately take down some of the best-known brands. This year's "Black Friday" results confirm the troubling downward path for brick–and--mortar stores, showing a 10.3 percent drop in sales, down from $11.6 billion in 2014 to $10.4 billion this year. Online sales on the same day grew 14 percent from last year, bringing in a total of $2.72 billion.

The number of buying options available to consumer will continues to grow. As a recent Cisco survey of retail trends discovered, e-commerce has added about 40 possible shopping options for a typical shopper. With the rise of the Internet of Everything (IoE) -- the explosion in networked connections of people process, data, and things -- potential shopping journeys will expand to 800 and beyond. Some of the new options coming into play could include mobile devices equipped for live Web engagements, checkout optimization, mobile payments, wearables, augmented reality, ride-sharing (e.g., Uber same- day delivery launched just over a year ago) and drone delivery.

Finally, consumer discovery is upending the traditional hierarchy of effects model (i.e. awareness---knowledge---liking----preference----conviction----purchase) that has guided marketers for decades and been instrumental in establishing retail brands. For example, unlike traditional advertising, individuals in the social media era have access to content that is not necessarily associated with commercial intent (e.g., to make a purchase); consequently, if a person likes the content, he/she is likely to pass it on to their peers, families, and so on via social sites, then the content will be quickly diffused without the help of traditional marketing.

So, how do you view the prospects of traditional retailers and what do they need to do to survive in the digital age?

William (Bill) Johnson, Ph.D., is a Part-time Participating Faculty in Marketing in the Huizenga College of Business and Entrepreneurship, Nova Southeastern University. He can be reached at billyboy@nova.edu

Balancing Gains and Losses

People generally fear losses more than they covet gains; losses are weighted more heavily than an equivalent amount of gains, e.g., the absolute joy felt in finding $50 is a lot less than the absolute pain caused by losing $50, a phenomenon known as “loss-aversion”.  Kahneman and Tversky stumbled upon loss aversion after giving their students a simple survey, which asked whether or not they would accept a variety of different bets. The psychologists noticed that, when people were offered a gamble on the toss of a coin in which they might lose $20, they demanded an average payoff of at least $40 if they won. The pain of a loss was approximately twice as potent as the pleasure generated by a gain. As Kahneman and Tversky aptly put it, “In human decision making, losses loom larger than gains.”

If you ever kept a gym membership long after it has become clear that you are not now and will never be a gym rat, then you have felt the effects (i.e. “dead-loss” effect) of loss aversion. Think about how insurance is sold, not on what consumers will gain, but what they stand to lose—insurance (and warranties) is by definition designed to mitigate “loss”.

Consider the following example of how loss aversion works.  A grocery retailer has tried to decrease people’s use of plastic grocery bags. One approach was to offer a five-cent bonus to customers who brought reusable bags. That approach had essentially no effect. Later the retailer tried another approach, which was to impose a five-cent tax on those who ask for a grocery bag. Though five cents is not a lot of money, many people do not want to pay it. The new approach has had a major effect in reducing use of grocery bags.

Here is another example of where loss aversion comes into play.  Suppose two companies sell calling plans. Company A advertises their plan for $25.00 per month, with a $12 rebate for continuing the contract for at least one year.   Company B advertises their plan for $24 per month, with a $12 surcharge for dropping out of the program before a year is up. Which is the better deal after one year’s worth of calls?  Of course, the economic costs of these two plans are identical, except that the plan offered by Company B is framed differently, i.e. as a potential loss, and would more strongly appeal to loss-averse customers.

Loss aversion has many practical applications in marketing, in particular when it comes to pricing, i.e. when using price increases, reference prices, limited time offers and price bundling.

Price increases – Whenever a customer sees a price increase, they interpret this as a personal loss.  Hence, businesses often see extremely emotional reactions resulting in lost business (e.g. Netfix lost 800,000 subscribers in the 3rd quarter of 2011 after an announced price hike).  One strategy, if possible, is to change the packaging of the product, e.g., Kellogg’s reduced the size of its Frosted Flakes and Rice Krispies cereal boxes from 19 to 18 ounces. Frito-Lay reduced Doritos bags from 12 to 10 ounces. Dial Soap bars shrank from 4.5 to 4 ounces, and Procter and Gamble reduced the size of Bounty paper towel rolls from 60 to 52 sheets.

Reference prices – A reference price is what your customers expect to pay.  If they are forced to pay more than this they consider it a loss.  Less is a gain.  Existing customers often use the last price paid as their reference price (and smart phones now offer instant reference pricing data).  However, for new customers, firms have the ability to influence their reference price.  We often see retailers show MSRP and then a marked down price--this to influence the reference price.  Alternatively, some companies choose to compare their product to one that is much more expensive in hope of increasing the prospect’s reference price (a tactic frequently used by off-price retailers like Ross or T.J. Maxx).

Limited time offers – If Macy’s is willing to sell a jacket at 50% during a sale that ends Sunday, why wouldn’t they sell it at 50% off on Monday?  The answer is loss aversion.  If potential buyers are on the fence about buying the jacket, they are more likely to go purchase it while it’s on sale.  Once Monday comes they have lost the opportunity.  If Macy’s doesn’t stop the sale on Monday they don’t have the extra incentive to go buy on Sunday (Walgreens features “Senior Tuesday” sales).  Loss aversion is one factor that drives the success of “sales”.

Bundling – charging a single net price for the overall exchange hides gains and losses on the component transactions and allows consumers flexibility in mentally apportioning the net price across the components in a manner they construe favorably.

People and customers in particularly don’t like to lose. This is why good marketing and sales is often all about convincing prospects that what they are about to buy is worth more than what they must pay for it.  Something is seen as a good value when any perceived pain of loss will be more than offset by the joy of gain. 

So, what about you, are you more likely to avoid losses or pursue gains?

William (Bill) Johnson, Ph.D., is a Participating Faculty in Marketing and at the H. Wayne Huizenga School of Business and Entrepreneurship, Nova Southeastern University. He can be reached at billyboy@nova.edu 

Multi or Single Item Marketing Measures? Now That’s A Good Question!

A firestorm has been brewing ever since Fred Reichheld claimed in his 2003 Harvard Business Review (“The One Number You Need to Grow”) article that the simple Net Promoter Score (NPS) measure of consumer recommendations was a good proxy of customer loyalty and an accurate predictor of business growth.  The publication of the HBR article was followed up with his bestselling book The Ultimate Question.  Many of the largest companies including GE, American Express, T-Mobile, Microsoft and Philips adopted the measure and in many cases, changed the way service is delivered to even tying employee and/or executive compensation to NPS scores.   The beauty of this measure is in its parsimony, consists of one simple question: “How likely is it that you would recommend us to your friends or colleagues?” Calculating NPS scoring is based on a 0-10-point “likely to recommend” scale ranging from “highly unlikely” to “highly likely.”  Those who score between 0 and 6 are considered “detractors”, those who score between 7 and 8 are “passives” and those scoring 9 or above are “promoters”.  The eventual NPS is then calculated by subtracting the percentage of detractors from the percentage of promoters.  For example, if 20% of Company X’s customers are detractors, and 60% are promoters, then Company X has scored an NPS of 40.

Companies have gravitated to NPS due to its straightforward approach to assessing loyalty and providing a clear measure of an organization’s performance through its customers’ eyes.  Further, the growing importance of word-of-mouth communications in driving future growth has made NPS more attractive.   Do higher NPS scores make a difference?   At American Express, for a promoter who is positive, the company sees a 10-15 percent increase in spending, and 4-5 times increased retention—both which drive shareholder value.   Research shows that sustained value creators—companies that achieve long-term profitable growth—have Net Promoter Scores (NPS) two times higher than the average company.  Further, NPS leaders outgrow their competitors in most industries—by an average of 2.5 times.

Yet, NPS has sparked considerable debate during the past 10 years as to the efficacy of the “ultimate question”, where a number of researchers have examined the construct’s validity and now the verdict on NPS is not quite as strong as when Reichheld first introduced the word-of-mouth metric back in 2003.   For example, in an excellent study by Keiningham, et. al (2007), their study’s results undermine a key supposition of NPS, i.e. that it is the single most reliable indicator of company growth.   Their findings, which contradict this supposition, have important implications for managers that have adopted the Net Promoter metric for tracking growth and have consequences as to the potential misallocation of resources.  Further, Mark Molenaar of TNS Research Surveys thinks that the score is too simple, too narrow and no better than other measures of satisfaction or advocacy.

This brings up an ongoing debate when it comes to measurement: “Are multi-item (MI) scales preferred over single-item (SI) scales such as NPS?”  According to conventional measurement theory, the (reflective) items comprising multi-item (MI) measure of a focal construct represent a random selection from the hypothetical domain of all possible indicators of the construct.  Using multiple items helps to average out errors and specificities that are inherent in single items, thus leading to increased reliability and construct validity.  Single-item (SI) measures seem to be a viable option in exploratory research situations where typically weaker effect sizes are expected and smaller samples are used.  Rossiter wrote that “when an attribute is judged to be concrete, there is no need to use more than a single item.”   Many scale development experts recommend following conventional wisdom and use MI scales when conducting survey research.  Back to NPS, Morgan and Rego suggest that if the NPS score is used, it should be supplemented with additional questions which would allow companies to further understand their customers and their reasons for recommending to friends and family.   Bain and Company suggests that research conducted using the Ultimate Question should be followed up with an open-ended question: “Why?”

*NPS Chart: www.davidmitz.com; by David Mitzenmacher, 2011.

William (Bill) Johnson, Ph.D., is a retired Professor of Marketing and Adjunct Professor in Marketing in the H. Wayne Huizenga School of Business and Entrepreneurship, Nova Southeastern University. He can be reached at billyboy@nova.edu