The Evolving Role of "Gut Instincts" in Retail

By Michael Haydock

The retail industry might just be the last bastion of the gut instinct.

In my 20 years working with apparel merchants, department stores and big box companies, I've seen bosses make bet-the-company decisions on little more than a "feeling." Retailing is that kind of a business - it's filled with wonderful visionaries who have an uncanny sixth sense for the nascent trend - or, the moment when a powerful trend is about to falter.

Managing with your gut isn't going away anytime soon -- nor should it. Nevertheless, recent years have seen an important shift in consumer behavior, suggesting that sellers need a few more tools in their bag.

For one, the retail environment is becoming much more seasonal. It used to be that the major retail seasons - or selling opportunities -- were Valentines Day, Black Friday and Christmas. Today, however, the previously minor seasons of Easter, Dads and Grads (in June) and Back- to-School are becoming much bigger - shoppers are spending a lot more during these periods. And new seasons - or mini seasons -- are popping up regularly. Cyber Monday is quite recent. And Teacher Appreciation Day is even newer.

Adding to the complexity, shoppers are creating their own "buy times" or "wait times" among product categories. I produce a forecast of retail sales in the electronics and appliance sector, and I noticed this new phenomenon after the 2008 economic downturn began.

Prior to the recession, consumers had plenty of disposable income - or at least plenty of credit - and thought nothing of buying clothing, electronics, home goods, you name it, all in a concentrated time period. Today, they're still buying, but they seem to be staggering their purchases. Their motivation may be to better manage their disposable income and balance credit outlays. A typical shopper in 2010 might buy a smartphone and then wait a few weeks or a month before taking home that new 50-inch television.

The result of this category rotation, combined with increased seasonality, is that trends are more important now, and they also form and dissipate more quickly. They're harder to anticipate. A retailer that fails to catch one of these buying waves is missing an opportunity.

In this new environment, the gut instinct can be substantially enhanced with a discipline known as predictive analytics, which blends algorithms and information - customer buying patterns, government statistics on disposable income, package shipment data, etc. - to peer into the future.

The good news is, most retailers have already made the investment in capturing the customer data, which is the necessary first step in developing an analytics capability. Many already use this data for traditional analytical applications, such as sales forecasts.

But the most sophisticated merchants have started to move beyond simple forecasting to predicting how particular products will resonate with specific customers. Armed with this information, they can target these customers with highly-individualized marketing initiatives - ranging from traditional advertising to cell phone ads. A few retailers are even using analytics to predict what "next action" they should take with each customer, based on all previous interactions with the customer.

It works like this: the retailer builds data models that incorporate what is known about a customer - items he or she has purchased (or returned), any complaints the customer has voiced, relevant buying patterns (e.g. likes to shop sales). Then, the next time the customer visits, either in person, on the phone or online, the retailer is ready with a customized approach. It might be recommending a certain product. Or, if the analytics indicate that the customer isn't ready to buy just yet, the retailer might helpfully suggest that he or she read a product review that just appeared in a magazine.

Analytics is helping these retailers - some with tens of millions of customers - evoke a time when personalized service was common among the Mom and Pop stores that ruled the retailing landscape. This personalization - the feeling that a retailer understands you -- is what drives customers to remain loyal.

It's not an either/or choice - instinct versus analytics. The best retailers are almost uncanny in their ability to marry their gut with really sophisticated data models and algorithms. They use sheer instinct to inform the analytics - and vice versa.

Retailing is one of the most competitive industries on earth. Merchants who excel in both the art and science of selling are likely to gain a big, sustainable advantage.

Michael Haydock is retail analytics leader of IBM Global Business Services.