Transforming Retail - From Product to Service

Retail was never easy, but at least it was simple. Lock up the right locations. Sell the right assortment at the right price. Treat your customers right, and they’ll keep coming back. In this simpler age, innovation in retail meant tweaks in assortment, moving milk to the back, brightening up the lighting, and upgrading the shopping carts.

The convergence of new players, new technologies, and dramatic shifts in customer expectations have catapulted retail to a new position – as one of the most disrupted and rapidly evolving categories. Nailing the fundamentals still matters, but it’s no longer enough to ensure survival.

This change in the marketplace necessitates a breed and pace of innovation the category has never known.

The prize in getting there is big. But so is the challenge. Cost-cutting is hard to repeat over time. There are several new models that retailers are trying in these new times. One of the most common is to shift from selling products to providing in-store and beyond the store services.

Retailers and merchants have provided value-added-services from the very beginning of sales. Originally the store provided the key service of providing access to goods in one place at an affordable price. They enabled customers to not have to travel far and wide to find these items. For this value-added-service there was a small mark-up fee built into the price. The economies of scale ensure that this worked too. The fee was small enough for customers to accept this. Now, with the world of online and social retail “Access and Price” competition is literally everywhere and new value-added-services need to be created for the retailers of today and tomorrow.

Our work at Fahrenheit with retail businesses across many different sectors has led us to five foundational principles that guide and inspire the shift toward services.

1. The Space Race

The floor plan has always been a zero-sum game, where dialing up one part of the business means dialing down another. Services may not have SKUs and shelf facings, but they need meaningful compelling space to foster awareness, consideration, and conversion – space wrought from other categories by narrowing the selection. Done right. The “mixed-use” store provides more reasons for customers to visit and linger and more interactions across the store. More places and ways to browse, read, chat, learn, play and buy. It all starts with a new approach to floor space. One of the standout examples is the Hema supermarket in China. They have skillfully and thoughtfully planned out the space to create more opportunities for customer engagement. In addition to regular groceries, they have an aquarium, kitchen, school, restaurant, and distribution center. Giving more reasons for visitation, spend, and immersion in the brand.

2. The New Math

Approaching a new model with old metrics – both internally and externally – is a recipe for frustration or disaster. A greater emphasis on services calls for a new set of metrics and measurement tools. Moving from the traditional counts of sales per square foot (spsf) and basket size to lifetime customer value (LCV), and omni-channel cross sales. Tried and tested online measurements can be applied to physical stores using new technology – measuring the length, breadth, and depth of customer engagement, dwell time, resonance with the community, advocacy, and multi-channel participation. The relatively new company that is leading the charge in this area is the Retail-As-Service B8ta that mixes online metrics with the in-store experience. Retailers can introduce new products to the market and test what works before rolling out throughout the chain. They get insights on foot traffic, time with the product, and interaction to purchase conversion rates which allows them to tweak and iterate as the market demands

3. Culture Shift

In simpler times, getting merchandising right (or wrong) was arguably the biggest quarter-to-quarter driver of any retailer’s performance. Little wonder then that merchandising heads wield great cultural and political power in any retailer with brick & mortar roots. This can pose a challenging headwind for a shift toward services. Shifting emphasis from hard physical products to the soft skills of conceiving, integrating evolving and delivering a service portfolio is hard to pull off in a business focused on rewards systems focused on sales.  It starts with a change in mindset and metrics: from selling product to enabling customer outcomes, and evolving employee performance measures. An example of this culture shift in retail to a service model is Rent the Runway. Sales associates are empowered “fashion therapists and stylists” who are encouraged to advise customers on what looks good. They create a Cinderella experience that connects with customers across all channels.

4. Form Follows Function

While many of the success factors in building a service business are quite nuanced, one is pretty black & white: being clear about whether the services portfolio is a vertical – existing to become its own business, with its own P&L – or a horizontal – a revenue-positive capability, but ultimately there to support the growth of the existing business lines. While there should always be some synergy between the service and product businesses, ambiguity about the ultimate role of services in the business can be fatal, as investment decisions, risk tolerance, value props, and payout expectations get murky.  Ambiguity about whether services are a vertical or a horizontal, means that business ideas rapidly turn into marketing ideas and therefore will soon be replaced by the next marketing idea required to keep the brand fresh.

5. Ecosystem Thinking

The product-to-service shift doesn’t just change our approach to square footage, but also the competitive landscape. New services may compete with constellations of very different types of vendors, or improvised solutions hacked together by customers. Mapping those broader ecosystems, the user journeys through those ecosystems, the pain points, and touchpoints within them, and the links across them become our new growth catalyst. Ecosystem thinking is more complex than benchmarking assortments, but there’s a way to do it, and tremendous value in nailing it. Finding new competitors provides access to new revenue, potentially better margins and can reinvigorate a business up for a new fight.

As the marketplace continues to shift and competition heats up from all directions it is crucial to take an innovative and offensive approach to retail. From optimizing space for customer engagement to defining new metrics and emphasizing different service-orientated skills, winning in retail will require a lot of changes, but developing a new mindset might be the most important yet.

At Fahrenheit 212 we empower our clients with the tools and expertise necessary to thrive in the modern innovation landscape. If you’d like to learn more about how Fahrenheit can help your retail business pivot to a service orientated model please contact us.
Cover image by Jezael Melgoza