Best Buy Separates the Angels from the Demons

Picture of Contrarian Marketing

This Case Study below, featuring Best Buy, is instructive about how contrarian marketing is ‘not magic’, but rather ‘just math‘.

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In the recent past, Best Buy Company operated more than 1400 stores throughout the U.S. and Canada and another 2600 stores in Europe and China. Despite the economic climate that has diminished or eliminated major retailers in the past decade, its share of the electronics market had risen nearly every year since 2000 when it claimed 15 percent of the market. In 2008, it was named second among the world’s six “most admired specialty retailers” (Fortune, “World’s Most Admired Companies,” March 16, 2009, pg 86).

At the Minneapolis headquarters of Best Buy, the company installed a mock “retail hospital,” that included a row of fallen retailers in bed (their logos propped on pillows) including the old Woolworth five-and-dime. A sign nearby stated: ‘This is Where Companies Go When Their Strategies Get Sick’. The point was to keep Best Buy out of those hospital beds and ahead of the big healthy guys: Wal-Mart and Costco.

The mock hospital is also a visual reminder that in the volatile world of low-margin retailing, complacency and follower strategies can spell illness, even death.

CEO Brad Anderson, known for producing research that tied a company’s stock-market value to its ability to identify and cater to profitable customers, decided to hire a consultant. His name was Larry Selden, professor of Finance and Economics at Columbia University’s Graduate School of Business, and co-author (along with Fortune’s Geoffrey Colvin) of Angel Customers and Demon Customers (Portfolio, 2003). Professor Selden argued that at many companies, losses produced by devil customers wiped out profits generated by angels. He insisted that a company should view itself as a portfolio of customers, not product lines.

Anderson liked the idea of separating the “angels” among his 1.5 million daily customers from the “demons.” Within the inner workings of Best Buy, the new approach became known as “centricity.” Basically, it means figuring out which customers make you the most money, segmenting them carefully, realigning your business, and training your employees to target favored shoppers with products and services that motivate them to return again and again. Contrarian Marketing applies this same process to B2B.

Purchasing histories of several groups of customers were analyzed, with an eye toward identifying bad customers who purchased loss-leading merchandise and returned purchases. As a result, the group discovered it could distinguish the angels from the devils, and that 20 percent of Best Buy’s customers accounted for the bulk of profits.

“It’s really about saying you have a limited pool of money, and as a business person you need to spend that money where you can get the most return,” explained Kelly Hlavinka, of Frequency Marketing, the ad agency that created Best Buy’s Reward Zone loyalty program (Fortune Magazine, “Best Buy’s Giant Gamble,” No. 6, 2006).

While Best Buy has benefited from the liquidation of Circuit City, the deep recession that led to its rival’s elimination also hurt Best Buy’s financial results, leading to a steep drop in net income in 2008. Former CEO Brad Anderson said that “seismic” changes in consumer behavior have created “the most difficult climate” ever seen by the retailer. However, business bounced back in the latest fiscal year with revenue up more than 10% and profitability on the rise, although modestly. With Circuit City out of the picture, Best Buy still faces stiff competition from Amazon. com, which has experienced rapid growth in consumer electronics sales, low-price leader Wal- Mart Stores, and Costco Wholesale, among many others. Indeed, in response to the changing competitive landscape and increased online shopping by consumers, Best Buy has announced plans to double its $2 billion in online sales within three to five years and is shrinking the size of some of its vast stores (Hoover’s).

Source:  Excerpt from the Contrarian Marketing Book  Chapter 1:

By Nick Mavrick

You can find Nick Mavrick on Google+

Washington DC & Ft. Lauderdale FL
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