Tuesday, May 22, 2007

In Praise of the Heavy Spender

I came across this article in ReportonBusiness.com. The author, George Stalk Jr., defines the importance of paying attention, and catering to, your top 20-30% of customers.

With virtually every category of retail products a very simple segmentation exists that is potentially much more powerful than any demographic or social-economic scheme being used: the heavy versus the light spender.

If you are a retailer or a supplier of consumer goods 20 to 30 per cent of your consumers are buying 70 to 80 per cent of your goods. This is not an insight. Indeed, this is the old 80-20 rule.

The insight is that the needs of heavy spenders differ from everyone else. These consumers think and behave very differently than light spenders. Heavy spenders have intense needs for product and service selection, a variety of types of information and service, and an emotional engagement with their category.

These consumers are worth focusing on. Yes, they are more expensive to serve, but do the math: Heavy spenders shell out four to 14 times as much in their favoured category than do light spenders. Get this right and big bucks can be made.

Retailers can "manufacture" the shopping experience of heavy spenders. By understanding how people shop and designing a store with that behaviour in mind, retailers can guide shoppers through their store and strongly influence their purchase behaviour, including the desire to return. Heavy spenders want point-of-sale material for performance products, "trial" opportunities for items where look and feel are important, logical product placement and organization of floor space, targeted promotions, etc. Generous return policies to encourage trial and affinity programs are further attractors of heavy spenders.

Consider Home Depot. The motto of most big-box retailers is, "stack 'em high and sell 'em low!" Home Depot was like that at one time. Its kitchen renovations department was the epitome of low costs - a limited selection of goods and minimal on-floor service to keep costs down and inventory-turns up. Then Home Depot realized that 70 to 80 per cent of that department's revenue was coming from 20 to 30 per cent of the department's customers.

That was an "ah-ha" experience for Home Depot executives. They speculated that perhaps the heavy spenders for kitchen renovations might be tempted to spend even more if the store organized the department around meeting their needs.

Heavy spenders want choice - and lots of it. They want information and help in making their purchase decisions. This means more selection and better-trained floor help as well as computer-aided design systems and suites of innovative kitchen layouts arranged in ways that heavy spenders could readily sense what they'd be getting for their money.

Home Depot's bet was that although the department's servicing costs would rise in the heavy-spender model, revenue and gross margin would increase even more. When the retailer experimented with a kitchen renovation department set up to appeal to the heavy spender, it found that revenue and gross margin per square foot were much greater multiples than those of the traditional, low-cost department meant to satisfy all consumers.

Home Depot had the added benefit of having many stores - stores that could serve as test sites to psyche out the needs of heavy spenders and attempt to scratch those itches. Heavy spenders in categories such as window treatments, painting and wall papering, bathroom renovation, basement redecoration and on and on were hypothesized and pursued successfully.

Such customers seek consistency in terms of value for money, quality, service, selection and a good purchase experience. In return, they become brand zealots - eager to spend their dollars and share their "find" with other heavy spenders in the same category. The heavy spender will, when served appropriately, spend more per visit, visit more often and "creep" into adjacent categories.

Further, a virtuous circle can be established, with the high revenue per square foot actually resulting in lower costs for the department, even though it is offering increased service.

Serving the heavy spender represents a huge opportunity to gain competitive advantage. The company that overinvests (by industry standards, anyway) in heavy spenders and makes it expensive for them to switch to a different brand (there are many ways to accomplish this) can increase its share of this group and enjoy a revenue gain significantly greater than that of competitors that average their offerings across spender groups. The company can also increase purchase volumes to the point that its costs go down, relative to its competitors.

The opportunities to serve heavy spenders are everywhere. In my travels I hear people excitedly describe their efforts to build home-security systems, meet the day-to-day needs of aged parents, fawn over pets, decorate gardens and be the best-equipped road warriors to earn the dough to pay for all this.

What about the light spender? Forget 'em! If they don't like it let them go elsewhere. Odds are, though, they are heavy spender "wannabes" and will actually respond positively to the efforts you make to attract and secure the heavy spender.

George Stalk Jr. is senior partner and managing director of The Boston Consulting Group of Canada Ltd. and adjunct professor of strategic management for the Rotman School of Management at the University of Toronto.


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