Discounting 'blue light special' research

Editor's note: Robert Passikoff is founder and president of Brand Keys, Inc., a New York research firm.

"We maintain a database of eight million transactions a month. Our K-trends tell us everything we need to about our customers and how to better serve them."

That's a direct quote from a senior marketing research person at Kmart. I won't mention the name. Not because it's confidential; it's just a professional courtesy in case that person's résumé is out on the street. The quality of mercy is not strained, even in our business.

Under other circumstances I might have thought that the statement was, at worst, wishful thinking in the face of declining market share, reduced profits, and increasingly skeptical looks from Wall Street. But it wasn't wishful thinking. It was a measured and confident statement, the grand finale to a conference call that had already been awash with this kind of arrogance. This is the brand of hubris that leads directly to serious - often lethal - difficulties so many companies are lately facing with increasing frequency.

The above episode happened some months before Kmart saw its stock plummet, before it was forced to circle the wagons into Chapter 11 protection mode. But, astonishingly, the arrogance continues: Marketplace realities evidently don't matter much to these folks. After all, what is a mere marketplace compared to billions of bits of research data? Kmart seems comforted - maybe "lulled" is a better word - by their trend data. Tons of statistics to slice and dice to their hearts' content.

Never mind that the insights and findings they ended up with - and ultimately acted upon - were statistically reliable, perhaps even excellent answers to meaningless questions. The past 30-days transactions data might have even been helpful in addressing inventory control issues, but it would give no clue at all as to what consumers really valued or what made them feel valued. Or what would make them come back to the store. It would not help Kmart marketers to understand how their customers actually "shopped" the category. It would not tell them how customers viewed the category, compared offerings, and, ultimately bought - and bought again.

"But wait," I hear you cry, "a big company like that must have conducted some sort of research besides looking at trend data!" One would hope so, but likely it was the kind of research that provided them with comfortable and easy answers, generally with large sample sizes. You know, they asked questions like "Would you like to pay less for [fill in product/brand]?" and "If we provided [fill in product/brand] at a lower price would you buy it from us?" and "Are we conveniently located?"

Clearly the data they continue to base their decision-making upon does not reflect the way the customers are going to behave in the near future. If it had, their "Blue Light Specials" would have had a brighter effect on their bottom line. Their "Stuff of Life" would have resulted in more animated sales.

Don't get me wrong. I'm all in favor of conducting research. It's how I earn my living. But ultimately, knowing what your customers did last week isn't much help when what you really need to know is what they are going to do two and three weeks down the road. Not only that, you have to know why. More often than not, multi-gigabyte databases offer only a highly accurate historical perspective. But so what? That refers only to previous transactions, not to the future ones your business depends upon. When you are dealing with 21st century customers, rear-view-mirror research just isn't enough!

Asking meaningless questions and sifting through the resulting data can be interesting. So is chess. So is medieval history. But, just like the wrong research approach, neither deals with your customer's shifting values. Old-style research doesn't take into account how fast customer values are moving. It doesn't provide an early warning system to guide planning. It doesn't reveal what people really think, or more importantly, how they are going to behave.

It's unfortunate that outmoded research is the foundation upon which many companies still base their brand and strategic planning processes. Even worse, it is usually the companies' only attempt to translate data analyses into actionable and strategic information. You know - information you can actually use to position a brand, correct a marketing misstep, or just plain get a jump on the competition.

To do that effectively, you need research that paints a realistic picture of your target audience's values. You need to understand what they are prepared to believe about your brand, and how they are prepared to act upon those beliefs. To succeed and be profitable you need to understand what drives loyalty in your category and clearly Kmart didn't have a clue as to what was happening in their own category.

The assessment system we recommend: customer loyalty metrics. They are highly correlated to sales and are a leading indicator of profitability. "Loyalty" is where you exceed expectations and customers come back to purchase more of what you sell, and are resistant to the competition - even in the face of tempting price points.

Annually, our firm conducts two waves of these kinds of assessments in our Customer Loyalty Index. We use a proprietary methodology that combines psychological inquiry with factor and regression analyses, and causal path analysis. This is a customer-listening system with metrics that provide leading-indicator assessments, which is why we knew months ahead of time that Kmart was doomed to fail.

Our participants include a nine-census region, nationally-representative sample of 16,000 men and women 21-59 years of age. They are customers of specific brands. We define "customer" as a user of a specific brand within a category at a specified usage/consumption level. Brand usage/consumption criteria are different for each category. Generally speaking, however, the assessments are made by the group accounting for the highest levels of profitability, i.e., the "Top 25 percent" of consumers of the product or service.

"Mass Merchandisers" is only one of the categories we measure. In the case of the Kmart assessments, respondents had to spend at least $75 annually at Kmart.

Had Kmart the kind of insights customer loyalty metrics provide, it would have known that the four drivers for its category are "location and value," "the shopping experience," "merchandise range," and the "store reputation." I've listed them in their order of importance to the consumers.

But to really develop customer loyalty (and attendant profitability) you need to know what consumers expect from each of the category drivers. If you know that, you know exactly how high is "up" for consumers and what consumers are actually willing to believe about the brand. Take a look at the chart, because it reveals a lot about the mistakes Kmart continues to make.

Chart

More often than not, the first-most important driver is really the price-of-entry into the category, the way "reasonable rates and fees" are to the banking category, or "availability of different grades of fuel" are to the gasoline category.

Had Kmart actually thought about developing a loyal customer base, it would have recognized that "location and value" and "merchandise range" were the price(s) of entry to the category. Using those as the basis for your brand positioning required that the word "commodity" appear in parentheses below the actual store name. What's more - surprise, surprise - they are the category drivers that have the absolute lowest levels of consumer expectations, because that's the store's raison d'être: to provide lots of stuff at the very nearly lowest prices possible at a convenient location!

"Shopping experience" and "store reputation" is where Kmart failed dismally. Probably because those kinds of customer values didn't show up anyplace in their "past 30-days transactions" analysis, which is why the Kmart folks couldn't have possibly realized that it is in each of these drivers that the highest customer expectations reside.

Why is it that I can easily envision Kmart executives sitting at home sniggering at the Wal-Mart commercial that focused only on how friendly the Wal-Mart employees are? You know the one. It didn't talk about products or low prices (they had other commercials for that). This one had some guy who looked to be 75 years old telling you that he was personally going to make sure you and your family have a really good day because you shopped at Wal-Mart.

Ultimately, Kmart created the unenviable situation for itself of "promises made, promises broken." Kmart advertised that it had the same stuff that the competitors had. But when suppliers realized that they were in danger of becoming creditors in a bankruptcy suit and stopped deliveries, shelf inventory dwindled. It doesn't do you any good to actually get folks to come to the store when the shelves aren't stocked! Doesn't matter how low your prices are if you can't actually deliver the goods.

Combine that with a worried work force that answers customer queries with a surly "What do you want?" and "Why are you bothering me!?" instead of a smile, and it doesn't take 30 seconds worth of transaction analysis to know that you have a brand and marketing fiasco in the making. Not actually caring about the customer resulted in long check-out lines at the register and, well, you get the picture. In the end, none of that could have helped "store reputation" either. It was only the Stuff of Life if you were currently living in downtown Moscow.

That was, of course, the second quarter's debacle. At the time of this writing, the most recent madness was Kmart's newest campaign in July. An attempt to actually change their audience. Its raison d'être was ostensibly to attract the 14-to-34-year-old age segment by borrowing brand equity from the flagging Joe Boxer clothing line. One industry expert likened the actual TV ads to campaigns run by Ralph Lauren and Abercrombie & Fitch. This struck another industry expert as a mistake. "It doesn't matter how good the ads look if people aren't treated civilly. Even more so if they come to a store and they can't find what they want. It's kind of a 'hitch you wagon to a falling star' scenario."

I was discussing the Kmart situation with a group of colleagues. One of them suggested that the senior research person I mentioned at the beginning of this article wasn't actually arrogant at all. "It's just that they've probably never actually shopped at one of their stores before," she said.

Studying the trends of those "eight million transactions a month" clearly didn't help Kmart. Nor was the Stuff of Life the right answer to its problems, and borrowing equity is always a dangerous game. If Kmart had only "listened" to its customers with the right tools in the first place, it wouldn't be in the trouble it's in now.