Turning Data Into Dollars

Retail CRM finds the payoff in reams of consumer data.

A customer at electronics store Best Buy might not recall purchasing Shania Twain's hit CD Come on Over back in 1997, but the $25 billion retailer certainly does.

In fact, since 1996, Richfield, Minn.-based Best Buy Co. has been collecting data on nearly every transaction made, rain check issued and call center problem resolved for 75 million customers. Now, with a robust, homegrown database of customer information, Best Buy's next challenge is to leverage the data into competitive advantage.

That's the challenge facing most large retailers today, according to industry analysts. The retail sector, unlike other industries, is managing relationships with millions of consumers, compared with perhaps dozens of clients in business-to-business sectors.

Most retailers have implemented call center and data-gathering CRM software and are beginning to wade into analytics and customer segmentation, which may someday channel special offers and incentives to individuals based on their buying habits.

"Retailers are trying to get to where they were in 1903," explains Cathy Hotka, principal at retail consulting firm Cathy Hotka & Associates in Washington. "In 1903, the person who runs the store knows the customers, can put things on credit, knows what will sell and when, and knows what not to buy. When they went to mass markets, that granularity was lost. Regaining that intimacy with the audience is very difficult."

A Quantum Leap

The process of moving from quarterly business intelligence reports to real-time customer segmentation is difficult because large retailers are collecting highly complex and granular information on their customers that can vary greatly from business to business. That requires customized applications, even when using specialized retail CRM packages.

When Best Buy began building its CRM capability in 1998, packaged applications weren't an option. "We needed to customize the core capability ourselves. Nobody knew the customer data as well as we did," explains Tim Anglum, Best Buy's director of CRM from 1998 to April 2004.

At Office Depot Inc., customers range from household buyers to large corporations through its stores and $3 billion online delivery business. Its CRM database holds records on a half-billion transactions conducted each year. The Delray Beach, Fla.-based office supplier installed software from Teradata in 1999 for its scalability, but it still required customization.

"No CRM on the planet doesn't need customization," says Kathleen Kennedy, vice president of customer development at Office Depot. But the core database technology of Teradata, a division of NCR Corp. in Dayton, Ohio, fit the bill. Today, Kennedy's team is developing a customer-centric data warehouse that will allow the retailer to automatically trigger marketing offers to individuals based on buying patterns.

"That will be one of the key competitive advantages in 2006 -- to move quickly and respond quickly to customers," Kennedy adds.

Though marketing to individuals is years away, retailers are closer to putting customers into several general categories. "Chances are good they'll dump you into a hopper of people like you -- male, female, age, neighborhood," Hotka says.

Retailers RadioShack Corp. and Toys R Us Inc. have been stocking their databases with customer information for years, she says, but "they weren't doing anything with it. They're trying to get some glimmers of insight into customer behavior. But it still doesn't have a thing to do with individuals."

Though the number of packaged applications is at an all-time high, that doesn't mean monster-size mainframes are going away. Instead, IT departments are tying in new databases and plugging in campaign management systems, e-mail marketing capabilities and analytical software that wasn't available before.

For business intelligence applications, for instance, retailers most often look at software from Cognos Inc., Hyperion Solutions Corp., SAS Institute Inc. and Business Objects SA, according to Robert Garf, an analyst at AMR Research Inc. in Boston.

For real-time, segmentation and "customer clustering" software, which offers advanced analytics, retailers are looking at Unica Corp., SAS, Teradata, E.piphany Inc., Blue Martini Software Inc. and Siebel Systems Inc., which recently purchased nQuire Software Inc., a maker of Internet-based business analytics software.

"The important piece is you might use separate software to do this but feed that info into operational systems, like the loyalty system, point-of-sale and marketing systems," Garf notes.

Future Capabilities

What CRM capabilities are in retailers' immediate future? "Anything that looks like optimization," Hotka says. "The use of statistics and algorithms to glean information from data on who might buy a given product. They'll use it to determine how to merchandise and price a new item, or how far to mark down an item that won't sell. They're finally getting to a point where they'll know to mark down slow sellers by 50%, not just 25%."

But although IT budgets have increased in the retail sector this year and interest in CRM is high, most retailers won't jump on new CRM applications quickly, predicts Adam Sarner, an analyst at Gartner Inc. "They're very cheap, and sometimes you're talking about razor-thin margins," he says.

But retailers should also be looking over their shoulders.

"Do very profitable and innovative retailers wait? No. They have gone crazy on tech spending because they've seen return. They get it," says Hotka. "You don't want to assume your competitor is waiting to enhance CRM capabilities."

Collett is a freelance writer in Chicago. Contact her at stcollett@aol.com.

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CRM Goes Vertical

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Copyright © 2004 IDG Communications, Inc.

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