Is 50% The New Most Important Retail Metric?
Author: Nikki Baird
In my travels, I have heard a number come up often enough, and in diverse enough situations, that it strikes me as more than a coincidence: 50%. From retailers as diverse as pets, automotive, and fashion, I have heard companies all set the same goal for themselves – to have, in some mid-term amount of time (3-10 years), 50% of their sales come from services instead of products.
Keep in mind that these are not branded manufacturers that we’re talking about – they don’t have a naturally built-in set of services like product repair or refurbishment. Rather, these are retailers who make their money today by selling other companies’ products to consumers. Some of them target to achieve this goal in five years, some in ten, and some are much more aggressive, looking to transform their business in the next three years.
And a transformation it will be – with even more of an impact on the make-up of the business than the advent of online selling.
Think about that for just a moment. The most aggressively omnichannel retailers (starting from traditional brick & mortar) are at somewhere south of 40% of revenue coming from digital channels, and most retailers are still below 30%. It took them roughly 20 years of online selling to reach that percentage. And now they want to remake their business, again, but they want to convert half of their revenue to a whole new area of selling, and they want to do it in far less than half the time.
If all of those services revenues are driven through stores, then basically, retailers are saying that on average, 30% of their revenue will stay online, 20% will come from selling products in stores, and the rest (50%) will come from services. Services that will mostly have to be delivered in stores.
One of the first things that happens whenever I mix retail and services is pushback: “my products don’t lend themselves to services.” I haven’t found a product that can be sold yet that doesn’t have the potential for services to go along with it. Broadly, there are four types of services.
1. Enable the Product
This is a broad category that encompasses everything from making it easier for the shopper to buy, to delivery, to assembly. Nutrition ratings on food in grocery stores? That is a product-enabling service. The people who assemble IKEA furniture provide a product-enabling service. The airport Sherpas that are increasingly found in every airport? They provide a delivery service that enables you to get even something as commoditized as a bottle of water without leaving your seat.
These are the easiest services – and thus retailers should consider them the lowest value-add services that they could possibly provide. And it may well be that in the future (or, in some cases, right now), these are so commoditized that consumers expect them as something included in the price rather than an add-on service they might sign up for. Nutrition services, for example, might help a higher-end grocer support a price premium, but the services are not something they would be able to charge extra for.
2. Service the Product
An example of this type of service would be, buy the bicycle and buy a no-hassle maintenance plan to go with it. Increasingly, rental would fall into this category as well, if you look at something like clothing rental as just having someone else do the laundering and dry cleaning. Retailers who sell the products become natural homes for servicing products – get the skis waxed at the place where you bought them.
But if the services are interesting enough, they can stand on their own. I just recently discovered The Lab, a sneakerhead paradise for cleaning and refurbishing collectible sneakers. While there are retailers who increasingly offer this service (especially as sneakerhead culture continues to grow), there is the potential for businesses that focus on the services first to get a toehold into retail as well.
3. Use the Product
Services that focus on product use are the kind that sell all-included fishing or camping trips, or educational classes, like, how to use a tile saw. Or cooking classes at a grocery store. They focus on providing both the products and the environment to make it possible to use the products, or at a minimum enough education that you can take the product home and use it there yourself.
At this level, the product isn’t the main focus, it’s what you can do with the product that matters – what problem is the consumer trying to solve? For outdoor equipment retailers, urbanization is making it difficult for younger consumers to own a garage full of camping supplies. In order for those customers to enjoy the outdoors, the trip really does need to be all-inclusive, everything from the location, the travel arrangements, to the tent, to the pots and pans for cooking over the fire.
4. Celebrate the Lifestyle
These services are the ultimate in pushing the product to the side in order to favor the brand. Ironically, while these may be the highest value in terms of building brand engagement, they are also ones that are often done as guerilla marketing stunts, like Tommy Hilfiger’s recent takeover of a Brooklyn hotel’s rooftop pool.
But lifestyle services can also be permanent – as another Tommy (Bahama) has demonstrated with the success of its restaurants. Or Atlas Obscura (granted, a media play rather than a retail brand per se) with its travel series.
Either way, the most important thing is that the immediate result should not be an uptick in sales of products. It should be more lasting loyalty to a brand that is “being its authentic self” in a way that resonates with consumers who want to identify with the lifestyle elements that the brand represents. People who participate in lifestyle services become more valuable lifetime customers, not instant shoppers.
The Bottom Line
If these retailers who are all homing in on the idea that 50% of their sales should come from services – in less time than it took for digital to hit 30% of sales – actually hit their goal, their retail estate will be radically reshaped as a result.
One immediate implication: if stores are already hopelessly out of date for how to serve the modern shopper, what does it mean for a store that has a major role to play in delivering services?
If these retailers not only succeed but prove that it is a winning strategy, then retail in the next ten years will indeed look nothing like it does today. That’s a big deal.