Finding new shoppers is the key to growth in retail... but some are more valuable than others

Black Friday may help you find new customers, but are they the right ones?
24 November 2020
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Sam Hart
Sam
Hart

Head of Marketing Insights, Worldpanel Division, UK

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The principles of penetration-based growth are well established: brands grow fastest through recruiting shoppers. Measures like frequency, loyalty and repeat rate are all key indicators, but it is penetration growth that ultimately dictates a brand’s scale and, in most cases, its success.

However, there are some business models where maximising shopper penetration at any cost is not the right choice. These are businesses where a significant upfront investment is required from the manufacturer; one large enough that recruiting light shoppers is not only undesirable but potentially problematic. Recruiting a few might go unnoticed but recruit too many and the business may start sleepwalking toward unprofitability, with this sometimes taking years to become evident. 

For these businesses, ‘Smart Recruitment’ is paramount in order to keep sufficient profitable shoppers to counteract the inevitable wastage of unprofitable and short-lifespan recruits. 

Recouping the upfront investment

Brands like this are ubiquitous today; where the supplier sells or even gives away an unprofitable system in the hopes of making profit on a refill of service. Everything from printers, mobile phones, free-to-play games, coffee pod machines, system razors, electric wax hair removal kits, electric toothbrushes… even Amazon’s Kindle tend to entail a significant upfront investment for the supplier. The hope is that this will be recouped over the consumer’s lifetime of purchasing – whether that’s a two-year phone contract or a few dozen coffee pods. The challenge is that lifetime can span years – even decades for some products – and so it can be difficult to understand which are the most valuable shoppers to target.

When these refill products are sold through grocery channels, that profit is then split with the retailer, and often further watered down by promotions. It is a difficult balance to tread: if the price of refills are too high, shoppers won’t engage and stop using the system; too low, and the brand has subsidised their behaviour – and so hurt profits.

On top of that, every time the price of the system itself is dropped to attract more buyers there is a heightened risk of drawing in a less engaged shopper – one who does not ultimately deliver profit. Worse yet, drop the system price too low and the product could be picked up as a gift, potentially for someone who will leave it in a cupboard to languish.

Thinking smarter 

We have analysed a range of these business models across a variety of manufacturers and found the breadth in quality and evolution of ‘Smart Recruitment’ is enormous. In some cases, more than one in two shoppers recruited never returned to the market. Let’s stop and think about that: the majority of these shoppers bought the system, then never refilled. That means the other half of shoppers have to deliver twice the value of their system investment to deliver profitability for that manufacturer. For many of these business models, that is an incredibly tough ask.

It is precisely because of this challenge that subscription models have gained such traction amongst these products. Gillette offers exactly this: a free starter kit followed by a subscribed refill arriving just 15 days later, though you can cancel at any moment. The added convenience appeals sufficiently enough to some consumers to carry on.

Of course, you can magnify that effect with a minimum term – guaranteeing profitability. Nespresso’s model follows this route, charging just £1 for the coffee machine, then £20 a month with a minimum term of 24 months. Of course, minimum term subscriptions put many consumers off – particularly when there are fears over long-term financial security as many have today. So, this represents a further narrowing of the field to even fewer shoppers – but each one profitable. 

A middle way

Which model, then, is better for these ‘system-based businesses’? Profitability is guaranteed with the minimum-term subscription model, but it will never achieve the same scale that other methods offer. A hybrid approach gives both profit and scale, with careful system price and marketing management key to success:

To make subscriptions profitable, there needs to be a minimum term that locks shoppers in for long enough to recoup costs. This can be supported through grocery retail activity and direct to consumer marketing. In these cases, any consumer is a win.  

Alongside this, when retailing through the grocers, the system price should only be moderately or lightly discounted, and carefully managed to maximise buyer quality. Grocery sales can be supported by encouraging conversion into subscription offerings. In these cases, it is best to avoid gifting periods and target quality shoppers through market enthusiast channels (such as magazines, articles, reviews). In these cases, every consumer is a gamble: so, you want to maximise your odds.

Of course, these are just general guidelines: each market is going to have its own nuance. Whether operating in grocery or subscription, the key is to ensure each shopper acquired delivers profit.

Under a fresh national lockdown in England, more consumers than ever will be attempting to replicate their usual out of home purchases in home (50% of consumers have attempted to replicate one at home since the beginning of the first lockdown ). It is no coincidence that coffee pod sales are currently growing 15% year on year .

Over 300,000 new shoppers have started buying coffee pods since lockdown began, but how many of them are going to go on to become profitable, long-term shoppers? How many decided to get their coffee machine on impulse? Searching for ‘Coffee Machine’ on Amazon reveals Amazon’s Choice product listed in a Black Friday deal: Nescafé Dolce Gusto, down to £29.99 from £34.99 on sale (20/11/20). 

Black Friday bonanza

Black Friday Week 2020 is upon us, and with it brings a fresh wave of discounted systems on offer. With all these new shoppers, there is risk that some of these are potentially unprofitable... so how can these brands maximise chances of profitability? The answer is to understand the shoppers that have been recruited, what they like, what they used to consume out of home (in cafés, pubs and restaurants) before lockdown – and create a tailored offering to deliver ‘Smart Recruitment’ for that business. This needs to consider:

  • What do these new shoppers want?
  • Which shoppers have delivered long-term profit in the past?
  • Do these new shoppers look like that? What have they been doing so far?
  • Who’s going to deliver profit?

Just recruiting shoppers from the right lifestage can deliver a 30% plus increase in their likelihood to become a long-term, highly profitable shopper. Get in touch to find out more about how brands can use Smart Recruitment to create a tailored plan, which ensures new shoppers are valuable ones.

Notes

  1. Kantar, LinkQ, 2020
  2. Kantar, FMCG panel, 24 w/e 01 Nov 20 vs 2019
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