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Tuesday, November 09, 2004

Analyzing Customers, Best Buy Decides Not All Are Welcome -Part 1

Wall Street Journal has an interesting article Retailer Aims to Outsmart Dogged Bargain-Hunters And Coddle Big Spenders - Looking for 'Barrys' and 'Jills.'Best Buy Co., is embracing a heretical notion for a retailer. It wants to separate the "angels" among his 1.5 million daily customers from the "devils." Best Buy's angels are customers who boost profits at the consumer-electronics giant by snapping up high-definition televisions, portable electronics, and newly released DVDs without waiting for markdowns or rebates. The devils are its worst customers. They buy products, apply for rebates, return the purchases, then buy them back at returned-merchandise discounts. They load up on "loss leaders," severely discounted merchandise designed to boost store traffic, then flip the goods at a profit on eBay. They slap down rock-bottom price quotes from Web sites and demand that Best Buy make good on its lowest-price pledge. "They can wreak enormous economic havoc," says Mr. Anderson, CEO- Best Buy. Excerpts in two parts :

Best Buy estimates that as many as 100 million of its 500 million customer visits each year are undesirable. Mr. Anderson's new approach upends what has long been standard practice for mass merchants. Most chains use their marketing budgets chiefly to maximize customer traffic, in the belief that more visitors will lift revenue and profit. Shunning customers -- unprofitable or not -- is rare and risky. Mr. Anderson says the new tack is based on the theory that advocates rating customers according to profitability, then dumping the up to 20% that are unprofitable. The financial services industry has used a variation of that approach for years,focussing on its bestcustomers and penalizing its unprofitable customers with fees for using ATMs or tellers or for obtaining bank records.Best Buy seems an unlikely candidate for a radical makeover. With $24.5 billion in sales last year, the company is the nation's top seller of consumer electronics. But Mr. Anderson spies a hurricane on the horizon. Wal-Mart Stores Inc., the world's largest retailer, and Dell Inc., the largest personal-computer maker, have moved rapidly into high-definition televisions and portable electronics, two of Best Buy's most profitable areas. Today, they rank respectively as the nation's second- and fourth-largest consumer-electronics sellers.
Mr. Anderson worries that his two rivals "are larger than us, have a lower [overhead], and are more profitable." In five years, he fears, Best Buy could wind up like Toys 'R' Us Inc., trapped in what consultants call the "unprofitable middle," unable to match Wal-Mart's sheer buying power, while low-cost online sellers like Dell pick off its most affluent customers. Toys 'R' Us recently announced it was considering exiting the toy business.
This year, Best Buy has rolled out its new angel-devil strategy in about 100 of its 670 stores. It is examining sales records and demographic data and sleuthing through computer databases to identify good and bad customers. To lure the high-spenders, it is stocking more merchandise and providing more appealing service. To deter the undesirables, it is cutting back on promotions and sales tactics that tend to draw them, and culling them from marketing lists.
As Best Buy prepares to roll out the unconventional strategy throughout the chain, it faces significant risks. The pilot stores have proven more costly to operate. Because different pilot stores target different types of customers, they threaten to scramble the chain's historic economies of scale. The trickiest challenge may be to deter bad customers without turning off good ones.
(Part II shall appear shortly.)

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