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Cross-channel optimization

IBM Business Consulting Services

Retail

A strategic roadmap for

multichannel retailers

IBM Institute for Business Value

In association with

IBM® Institute for Business ValueIBM Business Consulting Services, through the IBM Institute for Business Value,

develops fact-based strategic insights for senior business executives around critical

industry-specific and cross-industry issues. This executive brief is based on a

multiyear research study by the Retail Management Institute at Santa Clara University

and the extensive client engagement experience of IBM Business Consulting Services.

It is part of an ongoing commitment by IBM Business Consulting Services to provide

analysis and viewpoints that help companies realize business value. You may contact

the authors or send an e-mail to [email protected] for more information.

The Retail Management Institute, Santa Clara UniversitySanta Clara’s Retail Management Institute represents an industry partnership

committed to the advancement of retail knowledge. The Institute develops leaders

capable of effectively using consumer information and technology to manage change

in a dynamic and complex multichannel retail environment. The Institute’s innovative

undergraduate, management development and research programs are recognized

globally. See www.scu.edu/rmi for more information.

Cross-channel optimizationA strategic roadmap for multichannel retailers

Executive summaryA new, superior retailing model is emerging. This model

provides the retailer with powerful new capabilities based

on cross-channel optimization. It is not simply about

executing the same activities in multiple, separate channels.

Nor does it focus simply on integrating or synchronizing

channels to support cross-channel shopping.

Instead, it requires a systematic approach to exploit the

strengths of one channel to complement the relative

weaknesses of other channels. It involves the migration

of costly activities in one channel to a lower cost basis in

another. In many organizations, however, there remains

a general lack of a vision or a systematic approach to

achieve what this new model entails – developing multiple

points of cross-channel leverage and ultimately optimizing

resource allocation.

This paper makes the case for an emerging retailing

model, based on a multiyear research study by the

Retail Management Institute at Santa Clara University

and the extensive implementation experience of IBM

Business Consulting Services. The research effort was

conducted with senior retail executives across a wide

range of industry segments. The paper elaborates on

the conceptual basis for cross-channel optimization and

describes a four-stage iterative framework that retailers

can use to harness its power:

Stage 1: Align fundamentals

Stage 2: Achieve proficiency

Stage 3: Leverage across channels

Stage 4: Optimize the operating model.

Further, we identify four major strategic opportunities for

driving cross-channel optimization and illustrate these

areas with case studies from leading retailers:

‚" Trend and growth mining

‚" Efficient marketing communications

‚" Improved merchandise utilization

‚" Enhanced customer learning.

To be successful at cross-channel optimization, retailers

will need to proactively address key factors that can help

(or hinder) their progress. The charge must be led from

the top of the organization, treating multichannel retailing

as an enterprisewide, strategic issue. Internal objectives

and incentives must be aligned. The performance and

costs of specific activities in each channel should be

measured to identify the most promising opportunities

for optimization.

Because this process involves fundamental change

of the retail operating model, it will be neither easy nor

quick. But companies that learn how to make the shift will

build a strong platform for continued, profitable growth in

revenues and market share. They will develop the capabil-

ities for sustained market leadership in the 21st century.

1

2


The multichannel imperativeIn an increasingly competitive retail marketplace, the

end-to-end customer experience has become the

new battleground. Success in retail today requires

companies to deliver a superior, differentiated shopping

experience attuned to ever-changing customer needs

and preferences. A retailer’s multichannel strategy is

critical because of the central role its channels must play

in the information-rich, seamless and tailored shopping

experience customers are beginning to expect.

“Mere presence does not constitute

a multichannel strategy.”

— Executive VP, Specialty Retailer

Leading retailers today are harnessing both traditional

and new channels (i.e., physical stores, the Web and

catalog/direct) to provide customers with new and more

flexible ways of shopping. Having recovered from the

turbulence of the early dot-com era, companies are

becoming more sophisticated in their e-commerce

strategies. Many are even enjoying strong top- and

bottom-line growth in their Web businesses. However, it

would be premature to conclude that the multichannel

challenge has been fully and successfully tackled. The

industry remains in the early stages of a major evolu-

tionary cycle, and significant opportunities lie ahead for

companies that can identify and exploit them.

While emerging technology has been a key enabler,

multichannel evolution is fundamentally being driven by

consumers, who are demanding new ways of shopping.

Recent market research reflects the reality of customer

behavior patterns today (see Figures 1 and 2). While it

still accounts for a small proportion of overall retail sales,

e-commerce has continued to grow rapidly, averaging

40 percent annual growth over the past three years

(2001-2004). And in categories such as books, toys and

video games, consumer electronics, and cosmetics and

fragrances, its penetration is estimated to exceed 10

percent.1 For most retailers, Web commerce has reached

critical mass and become a truly important part of

the business.

Even more importantly, customers have eagerly incorpo-

rated the use of multiple channels in their overall shopping

Source: “State of Retailing Online 8.0,” Shop.org and Forrester Research, May 2005.

175

150

125

100

75

50

25

02001 2002 2003 2004

US

$ bi

llio

ns

Figure 1. Online retail sales growth.

51

76

114

141

590

Online retail sales

Online retail as percent of total retail sales

7

6

5

4

3

2

1

0

Percent of total retail sales

2.5

3.7

5.4

6.5

3


patterns. The Web has become a powerful and essential

channel for customers to gather information; an estimated

20 percent or more of overall store-based sales is being

influenced by the Web.2 Cross-channel shopping has

reached a level where it can no longer be ignored.

An effective multichannel strategy is therefore essential

to retailers’ drive to become more “customer centric.”

Customers view a given retailer (J.C. Penney, for example)

not as three separate businesses – a department store

chain, a dot-com and a catalog operation – but as a

single brand and company that should be able to serve

them in a consistent and harmonious way regardless

of the channel of interaction. This is increasingly true for

multibrand retailers as well.

Multichannel success is key to driving profitable growth

in retail. For those facing innovative, agile competitors, the

first requirement is to remain competitive and preserve

market share. Over time, the benefits will come from

increased customer satisfaction, improved cross-sell

and upsell, and greater share of wallet. True multichannel

retailing requires a new operating model, one that

provides new capabilities to help increase consumer

loyalty, drive revenue growth and reduce operating costs.

Reinventing the retail operating modelToday most retailers are operating in multiple channels,

but the channels remain distinct and only loosely

connected from both customer and internal perspectives.

This situation will be a temporary, transitory phase for the

industry. Retailers will move over time to deliver a truly

seamless customer experience across multiple channels

and touchpoints (note the distinction between these two

terms – see “Channels versus touchpoints” sidebar).

This will not be a dramatic, sudden transformation. It will

necessarily take place over a period of years through

continuous, incremental change. Retailers will need

to evolve in concert with their customers, developing

and deploying new capabilities that add value both to

shoppers and the business.

Figure 2. E-commerce penetration by product category (2005 estimate).

Computer hardware and software

Books

Consumer electronics

Cosmetics/fragrances

Toys and video games

Flowers, cards and gifts

Jewelry and luxury goods

Music and video

Sporting goods and equipment

Apparel

Home

0 10 20 30 40 50 60

Percent

6

48

20

13

12

12

10

8

8

8

5

Source: “State of Retailing Online 8.0,” Shop.org and Forrester Research, May 2005.

4


Multichannel retailing offers retailers the opportunity to

reinvent themselves. While much attention is deservedly

placed on customer-facing “front end” activities, the full

multichannel opportunity includes what goes on behind

the scenes. As customer shopping patterns evolve,

retailers have the opportunity to reinvent their underlying

operating model – to overcome the weaknesses and

better exploit the strengths of any given channel. As

discussed in the next section, the true benefit of multi-

channel retailing lies not simply in “integration,” but in

cross-channel optimization, a capability nascent, if not

absent, in most retail organizations today.

Channels versus touchpoints

In this paper, these terms carry distinct meanings:

• A channel refers to an organizational unit in which a retailer

goes to market, sells to and serves customers – for example,

a store division, an e-commerce business unit or a direct/

catalog division.

• In contrast, a touchpoint is a medium through which a

retailer interacts with its customers. Examples include Web

sites, the call center, store associates and the point-of-sale

(POS)/cash wrap.

This distinction is especially useful given the proliferation

of new touchpoints in retail today – such as self-checkout

systems, price checkers, kiosks and other points of service.

While today a touchpoint is usually “owned” by a given channel

organization, the underlying goal of multichannel retailing is

to leverage them across the entire enterprise. Eventually, the

internal channel distinctions may disappear, leaving only a

diverse range of touchpoints through which the retailer orches-

trates a unique, compelling shopping experience.

The power of cross-channel optimizationIn industry publications and at conferences, consid-

erable ink and airtime is devoted to multichannel issues.

Terms such as integration, optimization, consistency

and synchronization are often used in ways that result

in considerable confusion. This was evident in the wide

range of responses we received in the course of our

research to the simple question, “What is your multi-

channel strategy?”

Multichannel strategies must, over time, focus on more

than the performance of individual channels or simple

extensions of basic customer services across channels.

These strategies need to recognize the differences

between such distinct objectives as compatability,

integration and optimization.

‚" Compatibility is about whether the retailer’s value

proposition is presented across channels in a

harmonious or congruent way from a customer

perspective. It is achieved by explicitly aligning activities

in each and every channel to key value levers. In the

short term, key value levers might not be executed

consistently across channels due to operational or

technical limitations. For example, one retailer who offers

promotions around bundled sets of products in the store

was initially not able to present the same promotions

online due to technical limitations. In this case, one of

the key value levers (i.e., promotional offers) was not

compatible across both channels.

‚" Integration centers on cross-channel customer

shopping flows, an area that many retailers are

focused on today. For example, customers might

want to shop and buy online, but pick up the product

in the store. Enabling cross-channel shopping flows

requires synchronization and integration of the activities

performed by the retailer, but does not necessarily

imply a shift in where those activities are performed.

‚" Cross-channel optimization is about using the

capabilities of one channel to positively change

the cost structure of another channel. It involves

fundamentally changing the way specific activities

are performed, and by whom in the organization, to

increase their effectiveness and reduce their underlying

costs. Cross-channel optimization is ultimately the

basis for multichannel retail success.

The deeper opportunities of cross-channel optimization

are illustrated in Figure 3, depicted in the context of

a general model of strategy and a supporting activity

system. Triangles illustrate the retailer’s key “value

levers” (i.e., elements of their value proposition), and

5


Figure 3. Compatibility, leverage and optimization in a multichannel activity system.

Store-based channel

Customers

Value levers (compatible across channels)

Activities (circle size indicates relative cost)

Cross-channel leverage and optimization

Product testing

circles represent the supporting “activities” (i.e., things

the company does to deliver value to the customer).

Activities can be associated with one or more value

levers and can also be linked to each other, indicating

coordination or dependencies. Activities also have costs

associated with them, which are reflected in the figure by

the size of the circle.

The basis for cross-channel optimization is the significant

difference in the nature and costs of performing activities

across channels. Prior to the Internet, most retailers

worked within the limitations of a single-channel model.

Even though they knew some activities were costly, it

was difficult to make additional dramatic improvements

in activity performance within the existing channel.

Multichannel retailing provides companies not only with

new channels, but also new capabilities. It allows retailers

to improve the effectiveness of activities that are the basis

of unique or differentiated value levers, often through the

Buying

Highly informed

sales associates

Cross-channel shopping fl ows

Catalog/Web channel

Onlinetesting

Buying

Online learning centers

Dominant assortment

Product knowledge

A

V

Source: Dr. Dale D. Achabal and Dr. Kirthi Kalyanam, Retail Management Institute, Santa Clara University and the IBM Institute for Business Value.

introduction of new customer services or employee tools.

It also enables companies to change the cost structure

of existing activities by migrating them to a different

channel. For example, Figure 3 shows that some activities

which are relatively costly to perform in the store-based

channel, such as product testing and the customer

service provided by highly informed sales associates, are

being migrated to the catalog/Web channel. Conversely,

many aspects of buying are much more efficiently and

effectively performed in the store-based channel, and so

buying activities for the catalog/Web channel are being

migrated in that direction.

The big opportunities in cross-channel

optimization come from using the new

capabilities of emerging channels to

impact the operating model of the

dominant channel.

6


In their initial forays online, companies utilized the

capabilities of their store-based operations in launching

new Internet sites, for example, by exploiting the power

of their brands and buying organizations. Retailers

understood these points of leverage quite well, as this was

about using the power of a dominant channel to improve

performance in a nascent channel. However, as shown

in the case studies presented later in this paper, the big

opportunities for leverage and optimization are the other

way around. Going forward, the focus should be on using

the new capabilities of emerging channels to impact the

operating model of the dominant channel.

Achieving cross-channel optimization: A multistage roadmapCross-channel optimization is complex. Retailers need

a systematic approach to harness its benefits as they

will not accrue to the company automatically. We have

developed a multistage framework that companies can

use to guide their multichannel strategies and harness

the power of cross-channel optimization (see Figure 4).

In practice, retailers will likely have a portfolio of initiatives

that extend across the stages and progress through

them in an iterative process that involves moving ahead,

learning, rethinking earlier decisions and then again

moving forward.

Stage 0: Create presence

The starting point for most retailers is simply to “get

up and running” in a new channel, be it the Internet, a

catalog or a new store format. For many retailers, the

most recent example was going online in response to the

dot-com challenge. Issues of strategic differentiation and

cross-channel optimization were rarely a priority.

In this time period, the evolution of the industry also

suffered because e-commerce growth did not keep pace

with even the most pessimistic forecasts. Many retailers

did not realize a return on their initial investments, and e-

commerce quickly became a lower priority. Fortunately,

the industry has now largely moved past this stage and

is focused on making the most of new channels in the

context of the overall enterprise.


Figure 4. Stages of multichannel retail evolution.

• Get up and running in new channel(s)

Stage 0:Create

presence• Ensure basic value

propositions are in sync (e.g., assortment, pricing)

Stage 1:Align

fundamentals• Become adept

at foundational activities

• Integrate key customer-facing processes

Stage 2:Achieve

proficiency

• Exploit channel-specifi c capabilities

• Drive cross-channel collaboration

• Optimize resource allocation at enterprise level

• Achieve permanent and repeatable cross-channel processes

Stage 4:Optimize

operating modelStage 3:Leverage

across channels

7


truly leverage the organization’s existing assets, as well as

those capabilities that are being acquired and deployed

to support cross-channel optimization. Further, scale is

required for new channels to gain sufficient credibility

within the organization and earn greater management

attention and resources.

There are two key aspects of achieving proficiency in the

context of multichannel retailing:

‚" First, retailers aim to reduce the costs of performing

activities in the new channel by achieving economies of

scale. This is about going up the familiar learning curve:

the lower the relative costs, the greater the difference

with those in other channels and, therefore, the greater

the potential benefit of cross-channel optimization.

‚" Second, retailers respond to customers’ emerging

shopping patterns and information needs both within

and across the different channels. Examples of cross-

channel shopping flows include shopping online and

picking up in the store, or buying online and returning or

exchanging at a store. These shopping flows challenge

the different channel organizations to cooperate with

each other in meeting customer needs. To date, retailers

have largely focused on these types of issues, seeking

to deliver new cross-channel customer services and

engaging in the technology integration required to

seamlessly support them.

Example cross-channel services deployed by retailers today

Customer services

• Buy online, pick up in store

• Check store item availability online

• Cross-channel offers/promotions/gift cards

• Browse and purchase from e-commerce site while in store

• Online registration/scheduling for store events and consultations

• Multichannel gift registry

• Cross-channel returns

• Online access to account/loyalty program information.

Employee tools

• View and order from inventory in other channels/stores

• View and edit customer profiles/history from the store

• Access cross-channel customer/order information from

call center.

Stage 1: Align fundamentals

In this stage, retailers address two key questions:

1. What is our strategy to serve our target customer?

2. How is this strategy executed within and across multiple

channels?

Essentially, this stage involves mapping and building

out the activity system illustrated in Figure 3. With the

growth of the Internet, many retailers have created activity

systems to compete in this channel. The key issue is

the degree of alignment and compatibility of the activity

system with the retailer’s overall strategy.

Alignment is important because it allows the retailer to

present its value proposition in a compatible way in all

channels. Compatibility, in turn, is important because it

gives credibility to all channels, especially in the eyes of

the customer who sees only “one retailer” brand and not

distinct Internet, catalog or store-based divisions. While

fundamental aspects of the brand and value proposition

need to be aligned, absolute consistency is not the goal.

For instance, while core assortments should be the same

across channels, there may be differences in extended

assortments that have a unique role and capability in a

given channel.

To achieve compatibility, all channel organizations need

to understand, agree and execute on the fundamental

value levers for the retail enterprise. Lack of compatibility

can lead to subpar performance, and under such circum-

stances, it will be hard to pursue more advanced goals

such as cross-channel leverage and optimization.

As a practical matter, aligning fundamentals is not a

static one-time effort. As value levers change to meet

evolving consumer needs or match competitive moves,

activity systems will have to be realigned. Further, as new

channels and consumer touchpoints emerge, they will

have to be assimilated in the context of existing value

levers and activity systems.

Stage 2: Achieve proficiency

In this stage, retailers focus on achieving operational

proficiency and gaining scale in the new channel(s).

Proficiency and minimum operating scale are required to

8


A subtle, but important difference exists between the

previous two stages and the next two. As illustrated in

Figure 5, Stages 1 and 2 are primarily driven by “customer

pull,” focusing on the customer experience. Stages 3

and 4, in contrast, focus on achieving greater efficiency

and effectiveness in the retailer’s core operating model.

The balance in emphasis – and source of business value

– thus shifts across the stages, between customer-facing

(or “front-end”) activities and internally oriented (or “back-

end”) operations.

Stage 3: Create leverage across channels

In this stage, retailers seek to deploy the assets or

capabilities developed in one channel into another.

Consider the content and graphics developed for a

catalog business: This content can be reformatted and

deployed in other channels and touchpoints, such as the

company’s Web site and in-store kiosks. Strategies that

leverage these assets across channels can help eliminate

redundant activities that often unnecessarily exist or

develop over time in different channels.

“You need to recognize that each

channel has inherent weaknesses that

are not solvable, but may not need

solving because another channel

compensates.”

— Senior VP, Apparel Retailer

Leverage involves using the strengths of one channel to

compensate for the weakness of another. Each channel

has certain inherent challenges that are well known and

are not solvable in that channel, but can be addressed by

leveraging the unique capabilities of a different channel.

Several examples follow:

‚" For example, the store channel has to operate physical

sites, allocate inventory and manage sell-through on

a store-by-store basis, while the catalog or Internet

channel typically has only one central fulfillment center

in which inventory is managed. Clearly, it is much

more difficult to allocate and manage inventory across

hundreds or thousands of locations, and this forms the

root of one of the most critical problems in store-based

retailing – the challenge of having the right product at

the right place at the right time. “Endless aisle” kiosks

that provide customers access to centralized inventory

while in the store (e.g., via the retailer’s Web site) help

make up for the store’s shortcomings and can enable

the retailer to “save the sale” that would otherwise be

lost due to out-of-stocks.

‚" Another challenge of store-based retailing is that, by

and large, it is hard to personalize customer interactions

consistently over time and at scale. Historically, store-

based retailers relied on their sales associates to

recognize and maintain continuity with individual

customers, an approach that has been hard to execute

given the types of labor pools that most large retailers

draw from. Given the inability to engage in consistent

personalized communications, such retailers have

relied primarily on mass media advertising to market

to customers and drive traffic to the store. However,

Stage 1 Stage 2 Stage 3 Stage 4

Emph

asis

and

val

ue

Figure 5. Shifting emphasis and value in multichannel strategy.

Time

Source: Dr. Dale D. Achabal and Dr. Kirthi Kalyanam, Retail Management Institute,

Santa Clara University and the IBM Institute for Business Value.

Operating model

Customer experience

9


effective use of electronic media (e.g., e-mail or text

messaging) for marketing communications can be an

important step forward, helping retailers to develop the

capabilities for more sophisticated “mass personal-

ization” in the future.

‚" By contrast, the Internet channel suffers from the

obvious weakness of subscale distribution (i.e.,

the need to ship directly to individual customers at

comparatively high costs). To address this challenge,

some retailers have experimented with various models

that take advantage of store-based assets – for

example, offering to ship a product ordered online to

the nearest store for customer pickup and waiving the

shipping fee, or using “warerooms” in the back of an

existing supermarket to stage, pick and pack online

grocery orders.

‚" At first, the Web channel also lacked the ability to

deliver a “human touch” in the customer shopping

experience. Customers who preferred the immediacy

and ease of speaking with a sales associate were

left wanting. But through new technologies like live

chat and voice-over-IP, retailers are leveraging the call

center capabilities built for their catalog business into

the Internet channel to positively influence customer

satisfaction and sales.

Stage 4: Optimize the operating model

In the final stage, retailers seek to optimize their operating

models at an enterprise level. Optimization builds on

leverage. The basic logic is simple: If a capability or asset

from one channel is systematically available to the other

channels, the overall resources or budget devoted by the

enterprise to similar or redundant activities can be appro-

priately adjusted. For example, if the direct channel can

drive store traffic via catalog drops, then the mass media

budget of the store organization could be reduced or

redirected to more productive uses.

For many organizations, however, moving to a stage

where they can optimize decisions on investments and

activities at an enterprise level is very difficult and takes

time. As any senior executive in a store-based organi-

zation can attest, making the “comp” store sales numbers

is a paramount goal that drives management actions and

decision making. Few executives would relinquish control

of critical resources like advertising budgets simply on

the faith that the catalog or an alternative direct marketing

approach will drive store traffic and sales. They will need

measurable proof and assurance that it can be done in a

repeatable and predictable manner.

To optimize their operating model across channels,

retailers can follow the three-step process illustrated in

Figure 6.

1. The process begins with specifying metrics and

collecting data (for example, the volume of sales

coming from in-store kiosks and fulfilled through the

retailer’s e-commerce channel due to products that are

not available in the retail store).

2. Next, these metrics and measurements are used as

inputs to a response model. (Continuing the example,

the store-kiosk sales model is calibrated to account for

the propensity of customers to substitute purchases of

store-based stock for online inventory.)

3. The response model is then used to adjust resource

allocation. (Levels of in-store and e-commerce inventory

are optimized to reflect consumer willingness to substitute.)

An optimized organization structure and the right incentive

schemes, tied to the chosen metrics, are required to

support this process. Retailers will need to reassess their

incentive schemes so that the line executives meet cross-

channel commitments. This is hard work, but there are

significant rewards to those retailers that can make the

transition. The fact that this is conducted at the enterprise

level makes it difficult to imitate, and over time, it can

become a source of competitive advantage.

10


In addition to challenges related to organizational

structure and incentive schemes, lack of critical mass and

diseconomies of scale pose hurdles to cross-channel

optimization.

Building a critical mass of demand for new services in

a given channel is essential. When customers decide to

avail themselves of services in one channel, it creates

opportunities for leveraging and optimizing activities

in other channels. However, a lack of critical mass on

the demand side can limit these opportunities. For

example, an office supplies retailer might find that repeat

buyers of printers and related supplies conduct most

of their research online and do not need much help in

the store. However, before the retailer can reduce their

staffing levels in the printer category, the number of

“self-servicing” customers has to reach a critical mass

or overall customer satisfaction and sales will drop. In

the short run, the retailer may have to run parallel and, in

many ways, redundant activity systems to meet customer

needs. This emphasizes the importance of proactive

programs designed to drive rapid growth in the nascent

channel in order to achieve critical mass.

Achieving critical mass in demand requires creative

thinking. It involves designing customer incentives that

encourage the desired action on the part of shoppers. In

this regard, there are many lessons that retailers can learn

from the travel industry. Airlines and hotels have offered

incentives and penalties so their passengers are strongly

motivated to use new channels and touchpoints (e.g., the

Web or self-check-in kiosks), migrating customers from

high-cost to low-cost channels.

However, a perspective of cross-channel optimization

focused simply on achieving volume, profitability or

satisfied consumers will not do the job. Activity migration

means that activities are cut back in the original channel

which might result in a loss of previously realized

economies of scale. This loss of scale can occur due

to any number of reasons including indivisibility of fixed

costs and loss of buying power. Further, the retailer

may need to run “parallel” activities for a period of time,

which may be suboptimal in terms of asset productivity.

Therefore, the underlying cost structure of individual

channel-based activities must be evaluated before

attempting to pursue new optimization opportunities.

Strategic cross-channel opportunitiesIn this section, we illustrate how a retailer’s core operating

model can evolve across the four stages, using case

studies from our research among leading multichannel

retailers. In general, we found that retailers are focused

on one or more of the following strategic cross-channel

opportunities (see also Figure 7):

• Trend and growth mining

• Efficient marketing communications

• Improved merchandise utilization

• Enhanced customer learning.

Trend and growth mining

This opportunity area focuses on identifying consumer

trends on a continuous basis to help retailers create, test

and rapidly deploy/adjust new products, assortments,

brands and concepts. For example, one of the leading

Source: Dr. Dale D. Achabal and Dr. Kirthi Kalyanam, Retail Management

Institute, Santa Clara University and the IBM Institute for Business Value.

Figure 6. A management process for optimizing multichannel retail operations.

The optimization

cycle

(Re) Optimize resource allocation

(Re) Specify metrics and collect data

(Re) Calibrate response

model

11


U.S. consumer electronics retailers is effectively using

trend and growth mining to build customer loyalty and

increase market share. Company executives note that

one of their points of differentiation is not simply a

broad assortment, but a more subtle concept they call

“merchandise authority” – which represents offering the

most relevant assortment at any given time.

Following an alignment of key fundamentals, including a

clear definition of their target customer and their related

shopping patterns, the company focused on achieving

Stage 2 proficiency by initiating a series of activities

centered on building master customer files with a cross-

channel view. This allowed the company to initiate and

expand a series of tailored customer contact programs.

The gains from Stage 3 leverage of key activities are

occurring as the company focuses on building person-

alized programs designed to test and evaluate new

brands (and formats) for targeted customer segments.

This testing can best be performed in the online channel

and the knowledge then leveraged in the store-based

and catalog channels. Ultimately, the company’s goal is

to optimize these important assessment capabilities into

the company’s overall merchandise planning process

(Stage 4).

Stage 1Align fundamentals

• Solidify articulation of target customer segments and related shopping patterns

• Maintain promotional parity on core assortment across channels

• Implement consistent and compatible messaging

• Build and expand customer contact fi les per channel

• Assure that core assortment meets customer expectations and is consistent across channels

• Match product information delivery methods to customer learning needs

• Begin to deploy basic product item information

• Build product fi les with expanded attributes

Stage 2Achieve profi ciency

• Build master customer fi le with cross-channel view of customers’ purchase patterns

• Initiate/expand tailored customer contact programs

• Achieve balance between short-term ROI of marketing programs and long-term customer retention goals

• Balance of customer preferences and different channel practices

• Introduce channel-specifi c, extended assortments

• Differentiate extended assortments logically from customer perspective

• Develop interactive approaches to enhance shopping experience

• Deploy extended, information-rich master product fi les and integrate third-party content

Stage 3Leverage across channels

• Build direct-to-customer capability to test/evaluate new brands and formats for targeted customer segments

• Use marketing capabilities in one channel to drive traffi c in other(s)

• Identify where and how early sales trends can be used to improve merchandise planning and allocation decisions

• Use cross-channel inventory substitution capabilities to improve customer service levels

• Deploy interactive information delivery capabilities across channels

• Integrate product fi les to include information from all channels

Stage 4Optimize operating model

• Integrate direct-to-customer assessment capabilities into merchandise planning process

• Reallocate marketing budget at enterprise level to increase overall ROI

• Optimize assortment/ inventory investment by incorporating:

– Early sales trend analysis into merchandise planning and allocation process

– Cross-substitution patterns to jointly optimize inventory investment and customer service

• Reallocate customer service associates across categories

• Realign associate incentives

Trend and growth mining

Effi cient marketing

communications

Improved merchandise

utilization

Enhanced customer learning


Figure 7. Major cross-channel optimization opportunity areas.

12


Efficient marketing communications

The next opportunity area involves increasing the

efficiency and effectiveness of all communications

activities directed at a retailer’s current and prospective

customers, with a goal of building the brand and

increasing share of wallet. While measuring commu-

nications effectiveness in a traditional, store-based

environment is itself challenging, for retailers operating

multiple channels, the complexity increases significantly

– even more so for multiformat, multibrand retailers.

Consider a leading U.S. multichannel retailer of home

furnishings that operates multiple brands, has stores

in over 40 states and distributes more than 350 million

print catalogs per year. To support customer shopping

across all three channels and achieve scale, the company

realigned its operations to shift from a channel-centric

organization to a brand-centric organization. The company

has developed many linkages across its store and

catalog value chains to leverage (Stage 3) and optimize

(Stage 4) key value levers and activities. One of the most

significant is the use of the catalog as the key advertising

vehicle. According to one estimate, about 60 percent

of catalog mailings are to areas where a store already

exists. The catalog group uses targeted mailings and

control groups to measure the precise impact on store

traffic. In return, the catalog group receives a predefined

percentage of store revenue as a fee for the additional

mailings. This strategy provides a significant benefit to the

stores organization because of the leverage that exists,

allowing the internal transfer price for “advertising” to be

much lower relative to the costs of comparable mass

media communications typically employed by a store-

based organization.

Apart from its role as an advertising vehicle, the retailer’s

catalog database also contributes significantly in

developing new store locations. For example, purchase

frequency and sales volume data are analyzed to provide

a clearer picture of the market potential for a new store

and the likely cannibalization impact it will have on local

catalog sales. This case study is particularly interesting

in that a single capability, use of the catalog as a

marketing tool, enables multiple cross-channel optimi-

zation opportunities.

Improved merchandise utilization

The third opportunity area focuses on strategies that

increase inventory productivity. This includes, but is not

limited to, forecasting, planning and allocation of goods,

the setting of in-stock levels, and inventory sharing and

substitution policies across channels. Merchandise

utilization offers some of the greatest opportunities for

Stage 3 leverage and Stage 4 optimization in a multi-

channel environment.

One organization that is making considerable progress

is a retailer of children’s apparel and accessories in the

U.S., Canada and Europe. Its core customer is a young

mother who has a highly involved buying experience

with this product category over a relatively short period

of time. One aspect of the company’s merchandising

strategy is the frequent introduction of new outfits, which

are all available online, but not necessarily in all stores.

The tendency of this retailer’s customers to buy complete

“outfits” places significant restrictions on the extent to

which inventory investments can be reduced in stores

with lower sales potential, without creating significant

customer confusion and dissatisfaction. To address this

challenge, the company has leveraged the Web as an

“always available” location for all stores by introducing a

“save the sale” program.

Under this program, sales associates using “look books”

order out-of-stock items for customers from the Web.

Over time, the company hopes to further benefit from

this capability by optimizing the inventory in different

stores based on the volume class of the store and

the willingness of their customers to accept substitute

products or in-store Web ordering.

13


Enhanced customer learning

A fourth opportunity area refers to the value-added

selling activities that enable customers to understand the

products in a category and use that knowledge to match

specific products to their individual preferences. For many

customers, information about the product is as much a

part of the consumption experience as the use of the

product itself.

As an example, a major U.S. outdoor sporting equipment

retailer recognized very quickly that direct Internet sales

would be a growing and vibrant channel. In addition to

the commerce potential, the company noticed that its

customers had a natural affinity for the information on its

Web site, so it expanded the site to contain more than

45,000 pages of information on products and “how to”

articles. Recognizing the importance of providing its

customers with access to product information wherever

and however they chose, the retailer further enhanced the

information using third-party content and is redeploying

the content via in-store kiosks (and potentially in the

future, on wireless handheld devices in its stores).

This opportunity to leverage its digital media assets

led one executive to comment: “The changes we’ve

made, and will continue to make, are about providing the

maximum amount of information a customer needs to

make a purchase, at the time they need the information

and in the channel they’ve chosen to shop.”

Optimizing its operating model in Stage 4 will require an

assessment of the opportunity to reallocate customer

service associates across categories and a realignment

of associate incentives.

Enabling cross-channel optimizationEach retailer will have a distinct multichannel strategic

roadmap based on its particular market position, target

customer segments and internal capabilities. That

said, the following requirements will be common to all

companies as they work to create an optimized multi-

channel operating model.

‚" Drive multichannel strategy at a senior business

executive level. From the first stage onward,

multichannel success requires alignment of value

levers, strategies and metrics across different parts

of the organization. Because multichannel issues

inherently extend across brand, functional and channel

groups, it will be very difficult for managers within

these organizational silos to effect the necessary

changes. Retailers need a senior executive champion

for multichannel retailing that can transcend existing

boundaries and politics and explicitly link the strategy to

key corporate business objectives.

‚" Develop deeper insight on customers’ evolving needs

and shopping flows. Sources of customer insight

can come from both structured research (e.g., focus

groups, surveys) as well as ad hoc customer feedback

collected through store-based or online mechanisms.

Retailers should also seek to better leverage their

store associates, who remain a powerful and under-

appreciated source of insight and ideas. By explicitly

defining the future customer shopping experience

(e.g., through scenario and other envisioning tools),

organizations can build a common vision and more

easily communicate the desired end state.

In addition, retailers can directly measure how

customers are migrating across channels by tracking

and analyzing their transaction history. This will help

retailers better anticipate and respond to customer

shifts over time. It may require aggregation of

transaction data from each channel to develop a “single

view of the customer” – but in doing so, the key is to

define what information needs to be aggregated and

how it will be used both internally (e.g., by marketing)

and at the point of customer interaction (e.g., by direct

or store-based sales associates).

‚" Understand the costs of conducting individual

activities at various levels in each channel. How can

greater economies of scale be achieved across the

organization? Which capabilities should be deployed

from one channel to another? Will redeployment lead

to a loss in economies of scale? Assessing the relative

14


costs of specific activities will help retailers identify the

areas most likely to benefit from cross-channel leverage

and optimization.

‚" Prioritize investments through careful balancing of value

and cost/risk. As noted before, each retailer will likely

pursue a portfolio of different multichannel initiatives

across one or more of the evolutionary stages. Some

initiatives will focus on “low-hanging fruit” and others

on building foundational capabilities for the future. In

prioritizing potential investments, retailers should take

into account:

– Customer and competitive needs – Which capabilities

are essential to meet customer expectations? Which

are competitive “table stakes”? Which will provide

competitive differentiation?

– Operational feasibility – To what degree can we

make use of existing processes, systems and data?

How large are the gaps? Is the organization ready

to make the required changes in culture and/or

actions? Selecting a few “quick hit” initiatives can help

build momentum within the organization for more

substantive and complex changes in the future.

– Potential economic return – ROI should be evaluated

at the subinitiative and/or service (e.g., buy online,

pick-up in store) level.

– Opportunity for leverage – Companies should look

for areas of “critical mass” where a set of activities/

capabilities can support multiple cross-channel

customer services or value levers.

‚" Establish clear metrics and track results. Companies

should explicitly define metrics to assess the impact

of pilot programs and help them adjust their approach

accordingly. And because cross-channel leverage and

optimization often involves fundamental changes in

how assets, budgets and activities are managed, these

metrics are also vital to demonstrate the value of these

changes to the organization.

‚" Foster cross-channel and cross-functional collaboration

by aligning incentives. Many of the optimization

opportunities discussed in this paper involve

collaboration that is both cross-channel and cross-

functional. For example, using a catalog to assess sales

potential for new store locations requires collaboration

between the new store and the catalog marketing

teams. These teams work in different organizational

silos, have different mindsets and even use different

vocabularies. Appropriate incentives would be required

to encourage collaboration among these teams.

‚" Build an open, flexible IT infrastructure that can be

easily leveraged across channels and touchpoints. To

improve the ability to leverage the activity system from

one channel into another, the retailer’s supporting IT

infrastructure should move toward a unified platform

based on open standards. Due to historical factors,

many retailers have used disparate technology

platforms for different channels, touchpoints or

business units (e.g., business-to-business versus

business-to-consumer) that make future integration

difficult. The prevalence of hosted or outsourced

systems in the industry can further complicate matters.

Fortunately, open standards and new technology

architecture models are making it easier for companies

to deploy a given set of capabilities across different

parts of the business and to tie new systems together.

Examples include the use of a single order capture

system across multiple touchpoints (e.g., kiosk ,Web

site, call center) or the development of a unified content

management system that enables a “create once, store

once, use everywhere” strategy. Such approaches not

only help reduce the overall cost of implementation,

but also support delivery of a consistent customer

experience across different channels and touchpoints.

15


ConclusionOperating in multiple channels has become a permanent

part of the retail landscape as retailers move down the

path to true multichannel retailing. Companies that excel

can make it easier and more enjoyable for their customers

to shop, helping earn ongoing loyalty and drive greater

and more profitable revenue growth for themselves.

Cross-channel optimization offers retailers a means of

addressing key structural challenges and deploying new

capabilities. It is anticipated that this will ultimately lead

to fundamental shifts in the underlying operating models

and bring increases in effectiveness, efficiency and asset

productivity. However, companies that focus only on

tactical or channel-specific issues will likely miss the most

important areas of opportunity and struggle to overcome

inherent organizational barriers.

Retailers can use the four-stage framework presented

here to harness the power of cross-channel optimi-

zation. The framework is designed to allow a company

to tailor the specifics to its particular market character-

istics, competitive situation and existing strengths and

weaknesses. In many cases, these changes will not be

observable from the outside and, therefore, can become

important sources of competitive advantage.

The road ahead will likely be neither short nor simple. But

the potential payoff is well worth the effort. The time to

begin assessing these important issues and outlining a

comprehensive multichannel strategic roadmap is today.

Key steps to multichannel retailing success

• Drive multichannel strategy from a senior corporate level

• Develop deeper insight on customers’ evolving needs and

shopping flows

• Understand the costs of individual activities in each channel

• Prioritize investments through careful balancing of value and

cost/risk

• Establish clear metrics and track results

• Foster cross-channel and cross-functional collaboration by

aligning incentives

• Build an open, flexible IT infrastructure.

16


About the authorsDr. Dale D. Achabal is the L. J. Skaggs Professor, Director

of the Retail Management Institute, and Associate Dean of

the Leavey School of Business, Santa Clara University. He

can be contacted at [email protected].

Melody Badgett is a Managing Consultant with the IBM

Institute for Business Value. She can be contacted at

[email protected].

Julian Chu is a Multichannel Retailing Solutions Executive

for IBM Business Consulting Services. He can be

contacted at [email protected].

Dr. Kirthi Kalyanam is the J.C. Penney Research Professor,

Director of Internet Retailing at the Retail Management

Institute, and Director of eBusiness Initiatives at the

Leavey School of Business, Santa Clara University. He

can be contacted at [email protected].

Contributors

Kelly Chambliss, Partner and Multichannel Retailing

Leader, IBM Business Consulting Services

Christina Trotter, Consultant, IBM Institute for

Business Value

Craig W. Stevenson, Solution Manager, Distribution

and Commerce, IBM Software Group

About IBM Business Consulting ServicesWith consultants and professional staff in more than 160

countries globally, IBM Business Consulting Services

provides clients with business process and industry

expertise, a deep understanding of technology solutions

that address specific industry issues, and the ability

to design, build, and run those solutions in a way that

delivers bottom-line business growth.

References1 “The State of Retailing Online, 8.0.” Shop.org and

Forrester Research. May 2005.

2 Ibid.

G510-6186-00

© Copyright IBM Corporation 2005

IBM Global Services

Route 100

Somers, NY 10589

U.S.A.

Produced in the United States of America

07-05

All Rights Reserved

IBM, and the IBM logo are trademarks or

registered trademarks of International Business

Machines Corporation in the United States, other

countries, or both.

Other company, product and service names

may be trademarks or service marks of others.

References in this publication to IBM products

and services do not imply that IBM intends to

make them available in all countries in which

IBM operates.

Key Trends in Multichannel Retailing: Credit for Sale and Revenue AllocationBy Kelly Chambliss, Retail Multichannel Leader and Craig W. Stevenson, Global Solutions Leader

IBM Global Business Services

Background/business Problem

A number of studies have concluded that customers who

shop from multiple channels are more proitable and have

a greater lifetime value than those who shop from only one

channel. As a result, retailers are increasingly focused on

achieving channel transparency and consistency across

customer touch points. As well, consumers now use multiple

channels during a single buying experience, so the need

to service a customer seamlessly regardless of whether

the customer walks into a store, calls into a call center, or

goes to the website, is now an imperative. Misalignment and

inconsistencies can result in lost customers and revenue,

while positive experiences can deliver customer loyalty and

proit.

Too often retailers overlook the importance of aligning

performance metrics and inancial tracking/reporting

with their multichannel business and customer strategy.

As a result, investments in improved processes and

supporting technologies do not yield the anticipated return

and, ultimately, both customer satisfaction and company

inancials suffer.

Thus, deining an approach to recognize credit for sale

in a way which motivates employee performance and is

aligned with the retailer’s business objectives is critical to

multichannel success.

Leading Practices

At the most basic level, there are four credit for sale models,

as described in the table on the following page. It is rare for

a multichannel retailer to be using any one of the models in

its purest form. Both the Sales Channel Allocation and the

Fulill Channel Allocation models do not fully support cross-

channel transparency, while the Store Allocation model

is challenging to implement and does not fully motivate

seamless cross-channel customer service. The Product-

Based Proit & Loss (P&L) is often ideal as it eliminates the

fear of cannibalization and supports servicing the customer

regardless of the channel. However, this model would not

be as effective in an environment where selling “bundled”

solutions across categories is a priority. In such case, it

would need to be brought “up a level” or engineered to

support cross-category solution selling.

Critical success factors

Given that most companies are not currently aligned in a

way that enables the realization of an effective credit for

sale model, an emerging trend is to implement an allocation

model which shares credit across all involved channels.

Although it is dificult to deine and hard to implement,

such model can be effectively ine-tuned to align with a

company’s multichannel goals. While working through the

optimization of the credit for sale model, it is important to do

the following:

• Align sales/revenue tracking and incentives by brand or

category, not channel;

• Arrange an individual/team compensation and rewards

structure to align with multichannel goals and objectives;

and

• Establish benchmarks and measure multichannel

success in order to be able to refine the strategy,

organizational alignment, and incentives.

Global Retail Industry

Point of View

To learn more about IBM Global Business Services, contact your IBM sales

representative, or visit:

ibm.com/retail© Copyright IBM Corporation 2007

IBM Global Services

Route 100

Somers, NY 10589

U.S.A.


07-07

All Rights Reserved

IBM and the IBM logo are trademarks of

International Business Machines Corporation

in the United States, other countries or both.

References in this publication to IBM products

or services do not imply that IBM intends to

make them available in all countries in which

IBM operates.

BCW01677-USEN-00

Craig W. StevensonCraig W. Stevenson leads the global strategy, direction and

management for IBM solutions in the area of multichannel retail. In this role, he is responsible for defining the portfolio vision

while overseeing the execution of operations related to solution

development, strategic partnerships and go-to-market activities. Craig also works with major retailers to develop multi-channel strategies and build the operational and technology capabilities

required to deliver a differentiated customer shopping experience. Craig brings over 15 years of experience in marketing and strategy

in both the software and services industries. He has served in leadership positions at BEA Systems, BroadVision and Siemens.

Kelly ChamblissKelly C. Chambliss is a Partner at the IBM Global Business

Services where she leads the Retail Multichannel consulting

practice. Kelly has more than 12 years experience defining and delivering large-scale technology solutions with an emphasis on

channel integration, customer management, and E-Commerce. Her

functional expertise covers a broad range of specialties including

IT strategic planning, multichannel strategy, business process

design, enterprise portals and e-commerce, customer and vendor relationship management, software product development, and

enterprise application integration. In recent years Kelly worked with clients in the U.S., Europe, and Asia architecting and delivering innovative business solutions.

Scenarios / DescriptionSales Channel

AllocationFulfill Channel

AllocationStore Allocation Product based P&L

Financial reporting (P&L) By channel By channel By store/region At brand/category level

Online purchase from store Credit to store Credit to online Credit to store closest to consumer OR

the store that “owns” the customer

Credit to brand/category

Store purchase fulfilled from another

store

Credit to selling store Credit to fulfilling store Credit to selling store OR store that

“owns” the customer


Online purchase, pick-up in store Credit to online Credit to channel that

provides inventory

Credit to selling store OR store that



Online purchase fulfilled online Credit to online Credit to online Credit to selling store OR store that



Online purchase with partial shipped

and partial picked up in store

Credit to online Partial credit to online and

partial credit to fulfilling store

Credit to selling store OR store that



Online return in store Debit to online Debit online Credit to selling store OR store that


Debit to brand/category

Reserve online, pick-up in store Credit to store Credit to store Credit to selling/fulfilling store Credit to brand/category

Advantages May improve planning

accuracy

Credit goes to the store that

has the inventory

TBD Eliminates fear of cannibalization

Truly incents servicing customer

Less tracking/reporting than

complex allocation models

•

•

•

Disadvantages Involved channel receives

no “credit”; could

negitively impact morale

and demand planning

Chennels may “protect”

inventory

•

•

Lack of incentive for one

channel to send purchase to

another channel

Minimal incentive to drive online sales Significant organizational shift/

change for many companies

Credit for Sale Models

Commerce solutions

White paper

Transforming the shopping experience

with Web 2.0

September 2006

By Errol Denger, senior strategist, IBM WebSphere Commerce

http://www.ibm.com

Transforming the shopping experience with Web 2.0

Page 2

Introduction

The Internet has radically affected modern society, changing the way we

interact and do business. An estimated one billion people—or one-sixth of the

world’s population—are online, and the total number of Web pages exceeds

600 billion.1 The Internet has proven itself as a powerful business engine

capable of changing the dynamics of every industry from banking to retailing.

In 2005, online retail sales exceeded $100 billion in the United States alone,2

increasing at a blistering average annual growth rate of 26 percent over the

past five years.3

The Internet’s ubiquity and explosive adoption rate is accelerating the

innovation and evolution cycle of both technology and users. Users are no

longer passive browsers; they have become active participants in a powerful

social community that wields unprecedented power and influence. New

content and design principles that focus on reusability are replacing traditional

Web-publishing models. Rich Internet Application (RIA) technologies, such as

Asynchronous Java™ and XML (AJAX) are replacing static HTML to create sites

that radically improve usability and establish rich, interactive environments.

This white paper discusses the concept known as Web 2.0, wherein these

technologies and trends, coupled with other advances, are driving the next

generation of the Internet and online commerce. According to Tim O’Reilly,

CEO of O’Reilly Media, Web 2.0 is “the network as a platform, spanning all

connected devices. Web 2.0 applications are those that make the most of the

intrinsic advantages of that platform, delivering software as a continually

updated service that gets better the more people use it, consuming and

remixing data from multiple sources, including individual users, while

providing their own data and services in a form that allows remixing by others,

creating network effects through an ‘architecture of participation,’ and going

beyond the page metaphor of Web 1.0 to deliver rich user experiences.”4

Regardless of what buzzword you assign this evolution, it is important to

understand these changes to take advantage of the next generation of the

Internet and e-commerce models.

2 Introduction

3 Understanding the impact of

Web 2.0 for online commerce

3 Today’s Internet users are engaged

and participatory

4 Transforming the shopping

experience with Web 2.0

5 Harness active participation and

community to reach new customers

and stimulate demand

6 Harness active participation and

community to stimulate demand

and build loyalty

8 Building loyalty by taking

advantage of communities and

social networking

10 Provide a richer, more effective

shopping experience

12 Streamline processes and

purchasing experience

12 Single-page, streamlined

purchasing processes

14 ROI with WebSphere Commerce

Web 2.0 Store Solution

15 Summary

15 For more information

Contents


Page 3

Understanding the impact of Web 2.0 for online commerce

Web 2.0 technologies and evolutionary trends aren’t just going to influence

recreational Internet usage, but also have the ability to dramatically affect the

way companies interact with their customers and sell online.

Today’s online customers are savvy and have high expectations that continue

to rise. Customers do not tolerate poor shopping experiences, the inability to

quickly find and configure products, discontinuous processes or lost carts.

Moreover, customers do not differentiate between the Web and physical

channels, viewing both as a seamless representation of the same brand. These

savvy and demanding customers necessitate delivering a rich and effective

online experience to not only maximize online revenue, but to help ensure that

a company delivers a consistent brand experience. Failure to do so can result in

significant erosion of brand equity across all channels.

In a recent survey, 82 percent of shoppers who had a frustrating shopping

experience reported that they were less likely to return to the online store—not

a huge surprise. However, the study also found that 28 percent of respondents

stated that a negative online experience made them less likely to shop at the

retailer’s physical store, and 55 percent said that a poor Internet experience

negatively impacts their overall opinion of the retailer.5 In an environment

characterized by fierce competition and decreasing customer loyalty, it is

critical to optimize every channel or you risk jeopardizing brand equity.

Today’s Internet users are engaged and participatory

Internet users are no longer passive consumers of published information.

They have become active participants, openly sharing information and

driving powerful social networks of unprecedented size and influence.

Internet users employ a number of tools to actively contribute content and

voice their opinions using blogs, product recommendations and product

ratings. One example of this phenomena is participation in social networking

sites that have rapidly gained acceptance and are growing at explosive rates:

industry leader MySpace.com grew 230 percent year over year from 15.6 million

unique visitors in May 2005 to 51.4 million in May 2006.6 Other examples

include Amazon’s millions of customer-generated reviews or Yahoo’s three

billion song ratings that help create personalized Net radio stations.


Page 4

Online communities and sites that are designed for user contributions can be

described as architectures of participation.7 These sites embrace a number of

tools to actively engage users and solicit contributions. Fortunately, today’s

consumers have become more proactive and are embracing this opportunity to

voice their stories and opinions. Tapping into these forums is an art form that

can deliver real economic value to both sellers and manufacturers. This white

paper explores different methods to take advantage of these opportunities.


By understanding these trends and embracing the innovations associated

with Web 2.0, companies can enhance online effectiveness and increase

e-commerce revenue. The impact of Web 2.0 technologies to online shopping

is illustrated in Figure 1.

Figure 1. Customer-experience continuum stages

As we examine the impact of Web 2.0 across the stages of the customer-

experience continuum, three trends emerge:

• Establishing active participation and community

• Providing a natural shopping experience

• Streamlining processes

IBM WebSphere® Commerce Web 2.0 Store Solution enables you to capitalize

on these trends to help you transform the customer experience.

Active participation and community

Natural shopping experience

Streamline processes

Demand

generation

Demand is

pushed to the

customer by

retailer ads

“Word-of-

mouth” demand

is generated by

the community

Personalized

experience

Non-

differentiated

services such

as address

book, shopping

lists and so on

Personalized

user desktop

tailored to

individual

needs

Browse and

research

Retailer-defined

catalog and

navigation

Rich interactive

tools to browse

and compare

augmented by

peer reviews

Configure

and select

Related items

selected

separately

without visual

clue for the

overall look

Engaging

experience with

visualization

and product

selections

Shop and

transact

Significant

dropout due

to lengthy

multipage

checkout

Sales

conversion

through intuitive

single-page

checkout

Service and

support

Retailers

provide

answers to

common

problems

Community

helps to solve

all problems

Remarket

Focus on

retaining the

individual

customer

Use the

customer as

an advocate

to attract new

customers

Web 1.0

Web 2.0

Web 2.0

themes


Page 5

Harness active participation and community to reach new customers and

stimulate demand

Customer shopping behavior and product research patterns have undergone a

fundamental change. Today’s customers rarely begin their shopping or research

at branded storefronts. Instead, they start at community or specialty sites.

Another important change is that consumers are increasingly placing their

trust in peers, friends or colleagues, a practice that now plays a leading role in

driving consumer decisions and loyalties. According to the seventh annual

Edelman Trust Barometer, a survey of nearly 2000 opinion leaders in 11

countries, the most credible source of information about a company is now “a

person like me,” which has risen dramatically to surpass doctors and academic

experts for the first time. In the U.S., trust in “a person like me” increased from

20 percent in 2003 to 68 percent today. According to Richard Edelman,

president and CEO of Edelman, “Companies need to move away from sole

reliance on top-down messages delivered to elites toward fostering peer-to-peer

dialogue among consumers and employees, activating a company’s most

credible advocates.”8

Reaching new customers and stimulating demand mandates a mix of push and

pull marketing techniques coupled with harnessing communities and existing

architectures of participation.

Tapping into user-pulled demand

WebSphere Commerce Web 2.0 Store Solution is adding Web feed support.

Web feeds provide an excellent way of tapping into existing communities to

stimulate new demand and establishing effective dialogues with your

customers to build loyalty. Web feeds are not a replacement for e-mail

marketing, but can be used in conjunction to optimize the delivery of news and

messages to your customers. Because feeds are machine readable and use

Really Simple Syndication (RSS) or Atom Syndication Format technologies,

you can also use them to push updated news and information to partner sites.


Page 6

With Web feeds, you can deliver a range of information to current and potential

customers, from new product announcements to price reductions and

promotions or special events. Because feeds are cost-effective and don’t require

significant infrastructure investments, like e-mail marketing, you should

consider them as an integral element of your marketing strategy. Their

unobtrusive and flexible nature enables you to effectively reach either broad or

very targeted audiences through a wide range of sites, readers and devices.

A range of new techniques in search-engine optimization help enhance search-

engine placement to better tap into user-pulled demand. Along with the ability

to generate Google-friendly URLs with IBM WebSphere Commerce, Version

6.0, WebSphere Commerce Web 2.0 Store Solution supports integration with

Google Sitemap, enabling you to include all the URLs or pages you want

“crawled” or indexed.

Harness active participation and community to build loyalty

Traditional online interactions have been largely unidirectional, with sellers

presenting information to customers in a product- or event-specific context, as

depicted in Figure 2. Advances in online merchandising have improved the

ability to deliver highly targeted and personalized information based on user or

segment characteristics. These capabilities have significantly improved the

overall shopping experience, but the problem is that sellers are still initiating

the interactions, with shoppers playing a passive role.

Figure 2. Traditional customer interactions

Information

Transaction

QuestionsRetailer Consumer


Page 7

The goal is to build rich relationships with your customers based on engaged

and participatory interactions. As outlined earlier, architectures of

participation and engaged customer communities have redefined the way

retailers and businesses interact with their customers (see Figure 3).

Figure 3. Architecture of participation

Engaged customer communities have created a new form of economic value

that today’s most successful companies are tapping into. Peer production is a

concept used to describe a new model of economic production in which the

creative energy of large numbers of people is coordinated into meaningful

projects and results, mostly without traditional, hierarchical organization or

financial compensation.9 In the context of online commerce, this concept

includes user ratings, product reviews, online user forums, feedback loops

and blogs, which have become an increasingly credible and trusted source

of information. A recent consumer survey by the JC Williams Group ranked

consumer content as the top aid to a buying decision, as cited by 91 percent of

the survey’s respondents.10 Think about the economic value of Amazon’s

millions of user reviews or the useful advice and best practices provided in

hundreds of user forums.

Retailer

Engaged and

participatory

interactions

Conversations

Collective

intelligenceReal

economic

value

Consumer

community

Peer production

feedback, user reviews,

and so on


Page 8

As community involvement grows and critical mass is attained, collective

intelligence11 is reached at the point when users act as a filter for what is both

valuable and credible. Collective intelligence is important because it overcomes

“group think” to deliver clean recommendations, input and insight. With

critical mass also comes community self-management or policing. The best

example is illustrated by eBay, whose three billion user ratings and feedback

comments have created a self-regulating community.

The concept of customer communities applies equally well across the business-

to-business (B2B) landscape where communities—such as user groups or

professional user organizations—often already exist. The IBM developerWorks®

Web site has successfully deployed a range of community features to enhance

the brand experience and facilitate the free exchange of information such as

best practices and new ideas.

Building loyalty by taking advantage of communities and social networking

Establishing an architecture of participation, especially one that positively

contributes to brand image, can be difficult. To help maximize the potential for

success, IBM recommends a phased approach to building a community of

participants (see Figure 4).

Figure 4. A phased approach to establishing an architecture of participation

Engage site users

Product rankings

Community tagging

Controlled

participation

Moderated product

feedback and

recommendations

Architecture of

participation with

critical mass

Open community

and forums


Page 9

The first phase focuses on actively engaging site users. Product rankings

enable users to rate a product on a predefined scale (usually 1 to 5) and offer an

excellent way to solicit user feedback without having to moderate the process.

Embedded business logic helps ensure that each user can cast only one vote

and sample sizes can be displayed so that consumers know how relevant the

ranking is.

Community tagging enables users to assign personal tags or labels to items and

conduct keyword searches that return other user-assigned tags. These tags are

generally informal descriptions based on personal categories, usage or lingo

that might not otherwise be captured by traditional directory structures and

marketing terms. For example, a blouse might be tagged as being “chic”, “cool”

or “trendy” or slippers might be “cozy.” In a B2B context, an electrical motor

that can be used in multiple industrial settings might be tagged “fan motor,”

“belt drive” or assigned the name of a competitive offering or standard item

that this product replaces.

The second phase begins to establish an architecture of participation with

controlled interactions using blogging, customer reviews and discussion

forums. Until you have established a critical mass and better understand user

behavior, it is recommended that you moderate discussions to help ensure a

positive experience for all users as well as to avoid any brand erosion caused by

negative users. Some companies choose to permanently moderate and control

these dialogues. If you are not currently staffed to moderate these discussions,

a range of companies provide outsourced community-forum management

and moderation services.


Page 10

After you have established an active community and critical mass, you might

consider open and unmoderated communities. You can still filter and delete

any postings, but the difference is that in an open community all postings are

live and users can rank each other’s responses, which helps to alleviate

unproductive feedback.

The benefits of realizing this level of active participation include enhanced

brand experiences, increasing loyalty and providing useful feedback loops on

everything from products to services.

Provide a richer, more effective shopping experience

The Internet has proven itself as an exceptional online sales platform; however,

the core technology was never designed with the consumer experience in

mind. Online shoppers must navigate product-centric catalogs in which their

browsing, product selection and overall user experience are limited by static

HTML and forced page refreshes. As a result, customers might be frustrated by

the overall experience and are often unable to find, configure and select the

products they are looking for. This situation has resulted in low conversion rates

that hover around 2.4 percent according to the Shop.org’s annual survey.12

In contrast to static, product-driven experiences, RIA technologies provide the

ability to deliver an interactive consumer-driven experience, called the natural

shopping experience. WebSphere Commerce Web 2.0 Store Solution uses RIA

technology to deliver this more natural shopping experience—one

that is closer to a physical store experience.

The natural shopping experience focuses on understanding consumer buying

behavior and patterns to apply best practices to online shopping environments.

Because each customer has a different buying style, unique selection criteria,

personal motivations and shopping approach, you must deliver a dynamic

experience that accommodates these variations in online environments. You

can achieve this goal by empowering customers to select the attributes that are

most important to them and by providing interactive tools that easily enable

shoppers to find the right products for their objectives.


Page 11

WebSphere Commerce Web 2.0 Store Solution combines several Web 2.0

technologies to deliver the natural shopping experience. RIA select-and-

compare capabilities provide a dynamic shopping environment that enables

customers to visually filter products by activating specific parameters based on

their unique decision criteria (see Figure 5). Filtering is performed on the fly

without page refreshes. Selection criteria can include parameters such as price,

size, usage, materials or other attributes to visually sort and narrow the product

set until the desired results are displayed. Then, the items that make up the

product set can be compared side by side. This capability is particularly

effective for narrowing down large data sets or finding the right products when

there are many similar products with intricate variations.

Figure 5. RIA select and compare

Configuration and final selection is further enhanced by RIA mix-and-match

capabilities that enable customers to see how different products fit together

in specific configurations.


Page 12

RIA mix-and-match is an integral capability to creating a natural shopping

experience because it enables shoppers to see how different products or colors

work together, just as they would in a physical store environment. This

capability can also help increase cart sizes and cross-sells. And because the

RIA technology uses local computing power, customers can quickly select

from a range of configurations and almost immediately see the results.

Streamline processes and purchasing experience

Now that you have stimulated demand, established a robust shopping

experience and built loyalty through community, it is time to close the

transaction. The problem is that many customers abandon their shopping

cart at checkout, making this one of online commerce’s costliest problems.

According to Shop.org’s State of Online Retailing 2006, average shopping-cart

abandonment rates—which measure the site’s ability to close a sale with

engaged shoppers—were 48 percent in 2005.13 Many of these abandonments

are driven by frustration caused by the constraints of conventional click-and-

load HTML-based user interfaces. Poor usability of shopping-cart processes

requiring multiple steps and page reloads to check out, which can distract

from the shopping experience and result in abandoned carts.

Single-page, streamlined purchasing processes

WebSphere Commerce Web 2.0 Store Solution offers single-page checkout

based on RIA technologies to streamline the purchasing process. This

capability can dramatically reduce shopping-cart abandonment and help

improve the entire purchasing process.


Page 13

Single-page checkout enhances the overall shopping experience by providing

the ability to simply add products to a shopping cart using drag and drop, as

well as the conventional “add to basket” button (see Figure 7). Because the

shopping cart is always available and does not require page refreshes to update,

users can view real-time results of additions to their shopping carts—enabling

them to immediately calculate the effects that cross-sells, up-sells, or alternative

shipping options have on their bottom line. Because RIA technologies don’t

require full page refreshes, this information is provided in near real time.

Shopping carts are persistent and saved automatically, preventing cart loss in

the event of a dropped connection or connection timeout.

Figure 7. Single-page checkout


Page 14

When a user is ready to complete the checkout process, RIA technologies

enable that person to efficiently move through each step of the process with

one screen. Shoppers aren’t distracted by unnecessary, easily hidden fields

such as different shipping addresses. They can also easily jump from one step

to another or even continue shopping without losing any information they

might have entered.

Ultimately, these capabilities enhance customer satisfaction by making it

easier to do business, while increasing closure rates by reducing shopping-

cart abandonment.

ROI with WebSphere Commerce Web 2.0 Store Solution

Because WebSphere Commerce Web 2.0 Store Solution is designed to take

advantage of existing WebSphere Commerce store models, you can deploy it

cost-effectively to realize a rapid return on investment (ROI). You can use the

simple formula in Figure 8 to quantify the benefits of deploying Web 2.0.

Figure 8. Formula for determining the benefits of Web 2.0

When it launched its new site, a

discount apparel and home-fashion

retailer tested an HTML version of

its shopping cart against an RIA

single-screen checkout process. The

single-screen checkout converted

shoppers to a sale 50 percent more

often than the HTML version.

Another important tool to streamline

the purchasing process is the Store

Locator with Google Maps Mashup,

which supports buyers who would

rather pick up their order in the store

or continue the shopping experience

at a physical location. The Store

Locator with Google Maps Mashup

creates a custom map identifying the

closest store locations and providing

directions. With the integrated

buy-online, pick up in-store features

of WebSphere Commerce, your

customers can quickly pick up their

orders in local stores or at dealers

and continue their shopping

experience on site.

More site visitors

Higher conversion rate

Larger order size

• Search-engine optimization helps increase new visitors

through natural search and integration with the Froogle

shopping engine.

• Web feeds drive new and existing customers to your

storefront.

• The enhanced shopping experience delivered by Web 2.0

increases satisfaction and boosts repeat visits.

• An enhanced shopping experience through RIA select-and-

compare and mix-and-match capabilities helps improve

conversion rates.

• The single-page checkout tool helps reduce shopping-cart

abandonment.

• RIA mix-and-match capabilities help enhance product

bundling.

More site visitors

x a higher conversion rate

x a higher average order size

= higher sales revenue and net profit


Page 15

Summary

Web 2.0 provides a powerful response to today’s changing online customer.

Establishing active relationships with your customers and enhancing every

aspect of the shopping experience will ultimately build loyalty and increase

online revenues. Contact your WebSphere Commerce sales representative for

more information about the WebSphere Commerce Web 2.0 Store Solution and

a personal assessment of how Web 2.0 can help you transform the shopping

experience for your customers.

For more information

To learn more about Web 2.0 and IBM WebSphere Commerce Web 2.0 Store

Solution, contact your IBM representative or IBM Business Partner, or visit:

ibm.com/websphere/nextgencommerce

To join the Global WebSphere Community, visit:

www.websphere.org

http://www.ibm.com/websphere/nextgencommerce

WSW11267-USEN-00

© Copyright IBM Corporation 2006

IBM Corporation

Software Group

Route 100

Somers, NY 10589

U.S.A.


09-06

All Rights Reserved

developerWorks, IBM, the IBM logo and WebSphere are

trademarks of International Business Machines Corporation

in the United States, other countries or both.

Java and all Java-based trademarks are trademarks of

Sun Microsystems, Inc. in the United States, other countries,

or both.

Other company, product and service names may be

trademarks or service marks of others.

1 Kelly, Kevin. “We Are the Web.” Wired.com, August 2006.

2 “ComScore Forecasts Total E-commerce Spending by

Comsumers Will Reach $170 Billion in 2006.” ComScore

Networks, August 2, 2006.

3 Grau, Jeffery. Slower annual U.S. web sales to come.

Internet Retailer Magazine, July 2006.

4 O’Reilly, Tim. “Web 2.0 Compact Definition?” O’Reilly.com,

October 1, 2005.

5 Chung, Joe. “Delivering the Four Seasons ‘Experience’

Online.” DestinationCRM.com, May 1, 2006.

6 “Social networks grow big — but are still seeking ways to

monetize traffic.” Internetretailer.com, June 16, 2006.

7 O’Reilly, Tim. “The Architecture of Participation.”

Oreillynet.com, June 2004.

8 “A Person Like Me’ Now Most Credible Spokesperson

For Companies; Trust In Employees Significantly Higher

Than In CEOs, Edelman Trust Barometer Finds.” Edelman

Trust Barometer, January 23, 2006.

9 “Commons-based peer production.” Wikipedia,

July 23, 2006.

10 Wagner, Mary. “Clicking on All Cylinders — A New

Generation of Site Design Probes Deep into the Consumer

Mind — and Deeper into Web Pages.” Internet Retailer,

August 2006.

11 “Collective intelligence.” Wikipedia, August 5, 2006.

12 “The State of Retailing Online 2006.” Shop.org,

June 20, 2006.

13 “The State of Retailing Online 2006.” Shop.org,

June 20, 2006.

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