The Holiday Shopping Season Is Critical. Retailers Should Make It Less Critical
The conventional wisdom is holiday shopping season can be a make-or-break, do-or-die scenario for many retailers. According to the National Retail Federation, holiday season sales can represent up to 30 percent of total annual sales for some toy and game retailers—the industry average is around 20 percent. This year the NRF expects holiday spending to increase by almost 5 percent over last year, to around $720 billion. That is undoubtedly a big chunk of change.
Given that the stakes are so high, it’s not surprising that many retailers seize on promotions in order to get bodies through the door. By now the script is pretty routine: slash prices on flashy items like flat-screen TVs, instigating a semi-controlled riot on Black Friday, then hope that your customers will pick up a few profitable items as they claw themselves back to the checkout counter. The law of the loss leader prevails.
It’s a sad trap that emphasizes quick sales over durable customer relationships. What’s more, it doesn’t seem to be working. At least, it certainly didn’t work for Sears or Toys R’ Us. “We pay an awful lot of attention to promotions, and that’s usually where the rubber meets the road during the holidays,” Charlie O'Shea, lead retail analyst at Moody's, recently told National Real Estate Investor. “We’re not driven by revenue; we’re driven by operating income. Anybody can sell. The question is can you make money doing it? And the question for competitors becomes: How bad do you want that sale? Are you willing to sell a dollar for 99 cents?”
Holiday sales will always be important to retailers. But if you were a retailer, wouldn’t you want them to be less important? Wouldn’t you prefer a happy, engaged customer base that shops with you year-round, thus spreading your revenues more equally across your financial calendar? And wouldn’t you like to formalize that customer goodwill into some form of recurring revenue, so you don’t have to pull a Crazy Eddie routine every December?
“Holiday shopping is now almost entirely deal-, convenience-, and novelty-driven,” says Alexei Agratchev, CEO of RetailNext. “Massive holiday discounts are just a race to the bottom, and retailers can no longer absorb the losses. They need to prioritize yearlong delivery of friction-free, delightful shopping experiences. The days of retailers ‘pushing’ products, dictating where and when and how they can be bought, are over. Shoppers are in control now, and they want to be able to ‘pull’ what they want from retailers on their own terms.”
In fact, a lot of retailers are doing just that, by emphasizing a smart, omnichannel approach that emphasizes customer relationships over transactional tactics. And not surprisingly, many of them are smoothing out their financials with subscription-based services.
Now, I understand every retailer on the planet calls themselves customer-centric. After all, this is the industry that invented the concept! No one knows who coined the phrase “the customer is always right,” but it dates to late-19th-century department-store pioneers like Harry Gordon Selfridge and Marshall Field. Customer loyalty programs date back to the 17th and 18th centuries, when shop-owners issued copper tokens and specialty stamps that could be redeemed to buy products.
But the fact of the matter is that very few retailers really are customer-centric. Most of them just sell stuff to strangers. Case in point—those tired big box stores that make depressing headlines about stampedes every Black Friday. That money isn’t coming back in any steady, predictable way—they have to keep pitching the discounts, year after year.
“Today the real division is between data-driven, app-centric , flexible, and omnichannel retailing on the one hand, and old and stale retailing on the other,” says Mike Elgan, a columnist for Computerworld. This diagram sums up the contrast between old and new retail:
In the old linear model, you try to sell as many units as possible through as many channels as possible, and your poor lonely customer sits at the end of that supply chain process, anonymous and dispensable. That’s the “push.” In the new circular model, your customer (or better yet, subscriber) sits squarely in the middle of your business model, with you engaging her favorite channels as needed. This is the “pull.”
The result? Steady, dependable business from engaged customers. Less of a reliance on seasonal promotions. And business models supported by steady recurring revenue through additional services and loyalty programs—not discounts thrown at strangers every year.
So who’s doing this in the market right now? By now we’ve all heard of the new retail superstars like Warby Parker and Allbirds. But here are some other brands that place a premium on great customer experience as well as recurring revenue-based business models—and as a result, they aren’t depending upon the holiday season bump to survive:
b8Ta — This retail store, which sells trendy tech gadgets, doesn’t actually make any money from product sales. Its business model is entirely based on paid subscriptions from the product vendors themselves, which keeps it laser-focused on boosting their return on investment. What’s more, that steady recurring-revenue model makes it far less dependent on nailing those fourth-quarter holiday sales.
Peloton — This company sells relatively expensive ($2,000) stationary bicycles from various showrooms around the country and will no doubt benefit from a holiday bump, but a big part of its business is in online exercise classes, for which it charges a small monthly fee. The result? Steady recurring revenue, spaced evenly throughout the year, and a bike that eventually pays for itself when compared to SoulCycle classes.
Bonobos — Bonobos, which makes men’s clothing, doesn’t just put customer experience front and center—it literally puts the customer front and center. You can drop in or book an appointment at one of their “guideshops” for a consultation and have the clothes delivered later. The stores literally carry no inventory. The company is finding that customers who take advantage of their stores, not just their website, tend to spend 20 percent more on average.
Fender — While Fender sells through partners like Guitar Center, like Peloton they’ve also found a smart way to marry its relatively high price-point assets with compelling online content. They also offer great video courses for a small monthly fee. No doubt Fender appreciates the additional recurring revenue from the classes, but the real dividends are in customer retention—subscribers to their online content are much more likely to keep purchasing Fender products, and far less likely to stop playing. No more abandoned guitars in January.
Stitch Fix — Stitch Fix may not have any retail stores (yet), but the online personalized styling service is winning because it knows how to pair great customer intelligence with great human intelligence. The company boasts a repeat purchase rate of around 85 percent. The average customer provides the company with around 85 individual pieces of data. Around 85 percent of the average shipped box of clothing, or “fixes,” inspire direct customer feedback. As Gartner L2 notes, Stitch Fix’s success speaks to the power of entering into a recurring revenue relationship with your end consumer.
Tien Tzuo is a foremost authority on the “the subscription economy.” He is CEO and founder of Zuora (NYSE: ZUO), a leading subscription economy SaaS provider. Born out of Tzuo’s experiences at Salesforce.com, a pioneer of the subscription model, Zuora was founded in 2007 following Tzuo’s roles as chief marketing officer and chief strategy officer. He is the author of the USA Today, LA Times, and Amazon best-selling book, SUBSCRIBED: Why the Subscription Model Will be Your Company's Future - and What to Do About It.