Well up to now, we have discussed the kinds of channel benefits the customers want and how they could be used as a segmenting device. But now we want to move towards the nuts and bolts of how to systematically think about extract and leverage this information. In other words, let's establish a framework that could be used, for example, like the grocer who is considering an online channel in the last session. The channel benefit audit is a framework where market research and strategy meet. Our goal will be to identify the consumer's utility function for channel benefits. What's the utility function? Well, economists tell us that each customer may have their own unique waiting for each of the products attributes and these weights combined together to determine an overall utility score or what we might call evaluation for a specific product. This overall utility score corresponds to the customer's willingness to pay for the product. In other words, the higher the utility evaluation, the more the customer is willing to pay to acquire the product. The same logic applies to the utility evaluation for channel benefits, as discussed in previous sessions we have established, the customers may have different valuations for a channel benefit. As an example, variety an assortment maybe waited very highly for you, but not for me or my utility waiting for convenience, maybe higher on different purchase occasions, depending on how I plan to use the product. The channel benefit audit is an attempt to systematically capture these differences so that the firm can act upon it. The goal is to identify or estimate the consumers overall utility valuation for various channel benefits. We want to understand which benefit is weighted the most or the least, and how various channel benefits come together to collectively determined a customer's overall utility valuation. The presumption is that if we understand which channel benefits matter the most to a customer, this should also correspond to their willingness to pay for the provision of those benefits. So a benefit audit can help us answer key questions such as number one. If this retailer were targeting a large segment of customers who shared your own channel benefit utility evaluations, how well positioned is the retailer relative to their competitors? Number two? What is the price difference between the two retailers and is that difference justified via the differences and channel benefits? Number three. What new retail approaches might emerge and threatened this Retailers Competitive Advantage? Number four what steps might this retailer take to protect its marketplace position going forward? Here is how to conduct a benefit audit. I typically will ask my students to purchase an identical product from two different channel formats so they might shop for either a specific book. Be coffee or tea if you drink tea at two different retail outlets. Sometimes students will purchase a book at Barnes and Noble and on Amazon, so the audit is not restricted to just brick and mortar stores. Others might purchase at two different online retailers. The important thing is to not vary the product across the two retail outlets. Before you purchase, take a minute to imagine your ideal shopping experience for this product. What channel benefits would be met in your ideal shopping experience, for example, I'd like to have a retail location close to where I live, or I'd like to have a train sales person to educate me. You should list is many different channel benefits that would come into play or be desired in the entire ideal shopping experience. All the way from gathering information and learning about the product to shopping, making a decision and after sales support. Okay, hold on. Hold on. You should allocate 100 points among these channel benefits according to the relative importance of each to you. Then think about what attributes, activities or characteristics of a retailer you might measure to determine how successful they are at meeting each channel benefit need that you have. For example, if a channel benefit need was something like, I would like a train salesperson to educate me. Then you might measure how knowledgeable and helpful the sales people were at the retailer, etc. Just be sure that the measurement criteria are ones that can be observed and or measured. The second step is to then purchase your chosen product in two different retail outlets and assess how well the retailer delivers on your expectations. This is their actual delivery of channel benefits. This process helps to identify the gaps between the customers, utility function for channel benefits, that is their ideal experience and what they actually receive. This gap then informs what managers and the firm must do to create and deliver a purchase experience that customers value and will ultimately pay more for. Let's look at some audit data to help illustrate how to use the framework and identify next steps for the firm. I'm going to share two of the most common outcomes from a channel benefit audit. So here are the results of Stephen's shopping experience for a cup of tea. Stevens ideal shopping experience would be to have a wide variety of tea flavors available. This is his most important channel benefit, as he weighs it at 35. His next most important benefit is convenience. So the store location needs to be accessible, and the next two most important channel benefits are the product's packaging. Perhaps a tea has to have a sleeve that keeps the cup from burning his fingers and check out speed. He doesn't have patience for long lines. Finally, friendly staff would be nice, but it's not the most important channel benefit in his mind. Stephen purchases his tea from a McDonalds and a Starbucks, and you can see how well each of the channel benefits were met in the columns on the right. Now Starbucks clearly outperforms McDonald's, and this is due to the fact that they score five on Stephen's most important channel benefits tea variety and convenience. Perhaps Starbucks is located in his office building. They also do a better job of providing the packaging he needs. It's important to note that these three scores of the five collectively account for 75% of Stephen's total valuation for channel benefits. And this is clearly what drives Starbucks dominating delivery of channel benefits over McDonald's. In contrast, you can see how and where McDonald's falls short. Variety is the chief offender. McDonald's actually does pretty well as indicated by the force on 50% of the benefits that Stephen cares about. But since check out speed and friendly staff aren't the most important benefits, it doesn't really boost is overall utility score. Now, let's think about these results more broadly. It's important that you don't look at these scores and say, well, that's just one person. So who cares? Well, let's imagine that these were the results of market research and that these scores are representative of a segment of the population. I'm often asked, how would affirm get thes scores? Well, a focus group might be held in which customers are probed as to how they want to buy. In other words, they are asked, which channel benefits are important when they purchase or consume firm's product? And the firm might send a survey out to its current or potential customers to assess how important each benefit is. This is to collect the information on the benefit wait evaluation. This could also be collected using a technique known as conjoint analysis. A conjoint analysis would present a range of profiles in which the levels of channel benefits would vary and a consumer would be asked to choose the profile that they would prefer. Now using a mathematical process involving fractional factorials, it would then be possible to back out the consumers valuation weights for each channel benefit. So market research is really at the heart of this process. Now, let's suppose that McDonald's or Starbucks did this. And now, they're trying to determine what would have to be done to better target or acquire the variety seeking segment who wants their products to be convenient. That is customers like Stephen. Let's add some pricing information to help us answer this question. Stephen's tea at McDonald's costs a dollar and in Starbucks, his tea costs $2.25. Now, this is a big price differential. The question is whether this difference is justified. We can see that McDonald's cost less, but also delivers less channel benefit value than Starbucks does now. At this point, I will often ask the student Stephen in this case which retailer they would prefer to purchase from in general. And most of the time, they will indicate that they prefer the retailer that offers higher benefits even though it costs more. Now, think about this. Customers prefer purchase options that deliver on channel benefits even if it costs more. In other words, consumers are not always looking for the lowest price in the market place. Put differently, channel benefits can lead to a greater willingness to pay. So don't forget to monetize whenever you are providing channel benefits. Now the next question to asked, what should Starbucks or McDonald's do if they want to acquire or keep a segment full of individuals like Stephen? Well, for McDonald's, the best thing they could do to improve their overall score would be to offer more tea variety and that's because this is the attributes that Stephen cares about the most. It's weight is 35. Fortunately, this is also something that McDonald's can easily do or at least it would be less expensive to improve that channel benefit than to try and improve their score on convenience. Putting up another McDonald's location that is more convenient to Stephen's home, school or work location would be a costly investment. Let's consider Starbucks viewpoint. Where should Starbucks allocate their next dollar if they want to attract customers like Stephen? Should they try to improve their check out speed or train their staff to be friendlier? It's true that there two and three scores are low. So certainly there is room for improvement. But on the other hand, check out speed and friendly staff are of the least importance to Stephen. So Starbucks would be spending money on something that really wouldn't move the needle for consumers like Stephen. All of this is to illustrate how studying these scores can inform what either retailer or a competitors looking to enter should do. If you're a retailer, you really want a major on the majors. Look at which channel benefit would provide the biggest bang for the buck in terms of improving the overall utility score, then consider how costs feasible it would be to improve that channel benefit. And even for channel benefits that are not highly waited, there is still insight. These scores tell us that even if Starbucks were to improve staff friendliness given their low weight, it might not even matter. In fact, you could even say that given that Starbucks is dominating McDonald's substantially on Stephen's benefit valuations. Do they need to do anything at all? As long as they have a relative advantage over existing competitive alternatives for Stephen, there's really no need for them to hit a perfect overall score of five. So one extension would be to add additional columns. One for each viable competitor in the market who might target customers with a profile like Stephen. This would allow you to see the full set of market options in Stephen faces and understand their differences in the combination of channel benefits they offer. Now, many students will point out the customers don't usually come into McDonald's to purchase tea. So this analysis is incorrect. But I push back and say that it is still informative, because the fact of the matter is that Stephen does and did purchase tea there. And sure, the reality is that while customers may not go into McDonald's for tea, the product is playing a role in the customer's shopping basket which may be why McDonald's offers it on their menu at all. So for McDonald's, although this analysis focuses on tea, they might want to know more broadly what the customers who value flavor variety in convenient locations want in general and I will admit that I've simplified this exercise. By that I mean, I've abstracted away from shopping card issues or segment sizes and I've simplified the number of possible competitors in order to illustrate how to think about the trade-offs and benefit valuations that we observe in the data. And this is where the real kernel of learning is in this exercise. So let's use these numbers as illustrative and not ask more from this analysis than it can really afford. I want to make sure that you don't miss the fact that channel benefits are critical in driving our willingness to pay. This is why Starbucks Reserve Roastery locations can charge as much as $12 for a cup of coffee. It's not just the product, it's also how it is packaged and served up to you, check out this video. [MUSIC] >> When we thought about building something that had not been created before, what we said to ourselves is, let's not play it safe. Let's really stretch ourselves beyond what people could imagine, let's create the Willy Wonka of coffee. >> [MUSIC] We've always wanted to create a working roastery connected to a café, where you take that good in a way and say, let us really show you our coffee gets made. It has to be like a experience, like a stage like a show. [MUSIC] >> I loathe craftsman's and fabricators helped us toe create this place. We're doing all these little things that on themselves, maybe you don't really think that much of but when you start putting it all together is pretty stunning. >> Coffee is just going around in all different directions that's going from the roaster it to the bar. It's landing right behind the baristas, and whatever coffee you want to have, you can have a brute and whatever pleasure you like. >> This is the beginning of creating a new brand of rare and exotic coffee is called Starbucks Reserve, which are micro lot coffees that you can't find anywhere in the world. Everything we've ever done to this point has led us here, this is the moment of the next generation of Starbucks. [MUSIC] >> These locations are offering not just better coffee, but coffee served up in a unique environment in larger variety and with more complex services wrapped around them. All of these are channel benefits valued by customers and this value should be monetized. That's the job of the firm, so we've considered one common scenario that arises from a benefit audit and now let's consider another common outcome. Here is Stephen's experience shopping for a nice espresso, he purchases it at Target and Publix. And you can see the relative scores here with target dominating publics in terms of delivering on channel benefits. Now we add in their relative prices, and we see that although target provides higher channel benefits than Publix for Stefan, it charges lower prices. So the question then becomes what should Target and Publix do given these results? Feel free to pause the recording here and take some time to think about it before we continue on. Let's look more closely at Stephen's utility function for channel benefits, we see that his highest waiting is for purchase convenience, which is weighted at 35. His next most important benefits are wait time at 20 which, by the way is very related to purchase convenience and customer service at 20. This might include whether the barista or cashier or friendly or flexible with him in his order. Together, these three attributes account for 75% of his benefit preferences. If we just focus on these three, we see that Publix does a better job in terms of delivering on convenience than Target and it's slightly better on customer service, although not wow Publix fall short in terms of wait, time on this Target does much better. Target also does substantially better in terms of package size and variety, although these benefits are not as important for Stefan. Collectively, though, this is how Target edges out publics in terms of better satisfying Stefan's utility function. Now let's return to the question of what should target or Publix do. Given the purchase, convenience matters a lot Target could consider improving this, however, setting up closer store locations is a very expensive thing to do and may not be worthwhile just to gain the segment of customers like Stefan. Of course, it would depend on this segment size if the segment is large and they are geographically clustered together maybe it would make economic sense. However, there's not much that Target can do to improve its offering of this benefit. And frankly, since they are already dominating publics, they may not need to do anything. However, very valid argument to make at this point is that in fact, Target should be charging more for the benefit it is offering. We have already established that consumers would be willing to pay more for more channel benefits by not charging more. Target may be leaving money on the table so clearly one viable option for Target based on this analysis, it's the simply raise the price of its iced espresso drink. Let's consider Publix, the fact that Publix conveyed away with charging higher prices for lower benefits may be due to factors such as the fact that people are already in the store likely to purchase other things. In other words, it's a shopping basket issue in this case, perhaps ice espresso is an add on item but the main shopping cart is why Stefan is in the store to begin with. This might explain why Stefan rates public's very high in terms of purchase convenience. At any rate, Publix is in a good position in that it can offer lower channel benefits while enjoying higher price. Of course, if it were to lower its price, it might experience revenue growth as more consumers would be willing to purchase it. But at this point, we don't know what the segment sizes for shoppers like Stefan, if the segment sizes, large Publix should stay at this price point because they will purchase at this price. If, however, Publix really want to improve its benefit delivery for customers like Stefan, then it's next dollar towards, this problem might best be spent on improving wait time or customer service. Shorter wait time, perhaps from having another cash register open or providing an ordering app could substantially improve its score given that both of these benefits are equally weighted. The next question Publix should ask itself is which of these benefits would be less expensive to offer or improve and which could be offered the most consistently? It may be the getting employees to be friendlier is a costly effort, or it may not get consistently manifested across customers. >> By this, I mean that some employees might be better at being friendlier to customers than others despite training efforts. Finally, another question, we might ask is how easy is it for iced espresso competitors to enter? We know from economics that if margins are healthy and the target market size is substantial, these conditions would create incentives for new players to enter. If a competitors were to enter, it would have to beat out publics in target on convenience in customer service. Customer service may not be too difficult to improve, given that the scores on it are 3.5 and 2.5. Let's brainstorm about what kind of channel format would be both convenient and friendly or flexible. These days, we see a lot of pop-up retailers or even kiosks. Imagine if you operate a kiosk and Stephen's office building lobby and handed him his drink with a smile, then you would be extremely convenient to him. And if you could keep the wait time down via a nap or extra hands at peak time, you really have a good shot at him. Add on a high price and you are set. The point here is to illustrate how you might think about what a firm could do to target customers with a certain channel, benefit, profile and utility function. This is one way that market research about how customers want to buy rather than just about what products they want to buy can be a source of tremendous strategic value. This type of analysis can really give you insight into how channel benefits can be a source of do value creation for customers, as well as help you identify a range of possible solutions and provide insight into how you might best allocate scarce resources. Thus, a key point to takeaway is that a firm can grow its market share without ever having to change its product line. Now this has massive implications, because changing product attributes in design can be a costly process that requires long-term investments and substantial resources. What our discussion today implies is that there might be other ways that you can delight customers by simply understanding how they might want to buy your products. Let's think about this differently. By triggering a customer purchase on the basis of how customer wants to buy instead of what they want to buy, it means that it almost doesn't matter what your product is. It could be commoditize or even inferior to the competition. However, if your provision of channel benefits are superior, you can sell and move product on the basis of that alone and this is how we grow market share. Let's move on. I have looked at hundreds of student audits over the years and many of them take the forms that we have just discussed. What is also true in recent years is the growing role that the channel benefit of convenience is playing. In the analysis of these audits year after year, students site convenience as a key desired channel benefit and its weight is always high or increasing in importance. So let's consider how firms are competing on the basis of convenience. Amazon is really a leader in creating convenience. And if you think about what they sell their products, those air completely commoditized. Meaning that they can be purchased anywhere and are rarely differentiated, but the reason why people purchased through Amazon is the ease and convenience of doing so. They make it really, really easy for us to give them our money. A great example of this is their ghost stores, which were introduced in 2016 and are currently in a few markets. Let me show you how these work. [MUSIC] >> Four years ago, we started to wonder, what would shopping look like? If you could walk into a store, grab what you want and just go. What if we could weave the most advanced machine learning, computer vision and AI into the very fabric of a store? So you never have to wait in line. No lines, no checkouts, no registers. [MUSIC] Welcome to Amazon Go. [MUSIC] Use the Amazon Go app to enter, then put away your phone and start shopping. It's really that simple. Take whatever you like. Anything you pick-up is automatically added to your virtual cart. If you change your mind about that cupcake, just put it back. Our technology will update your virtual cart automatically. So how does it work? We used computer vision, deep learning algorithms and sensor fusion much like you'd find in self-driving cars. We call it just walk out technology. Once you've got everything you want, you can just go when you leave are just walk out. Technology adds up your virtual cart and charges your Amazon account. Your receipt a sent straight to the app and you can keep going. Amazon Go, no lines, no check out. No, seriously. [MUSIC] >> Athough the technology functions well and its current small store format of about 2,500 square feet, it is harder to use it in bigger spaces with higher ceilings and more products. Meaning that it could be some time before it is rolled out in larger stores. A Whole Foods Store is about 40,000 square feet. So there's a huge gap to be scaled. A Whole Foods Store is not as large as most grocery stores like Publix or Stop and Shop, or Kroger. However, if Amazon can practice, it would be really transformative as grocery is a high frequency purchase that we all must make. If you've ever been to an IKEA store, you know that their massive and it could take hours to wind through them. In order to improve their convenience, IKEA now has more clicking collection locations than full sized stores. So customers peruse their stock online and they pick-up the products in these locations, which are about 20,000 square feet versus the 72,000 square feet of a full sized store. Sales in these smaller locations have grown by 7% compared to approximately 5% in the large stores. Uber deliveries is all about convenience. And during the pandemic, they had the added benefit of making product variety available to those in quarantine. Thes deliveries generally occur within 5 to 30 minutes of order placement and its growing at a rate that could Easily exceed $6 billion annually. Uber Eats is constantly trying to innovate, even considering how and if drones could play a larger role in food delivery. Their CEO has even said that what they really need are flying burgers. Finally, consider how more and more stores are becoming on the channel in their routes to market, incorporating an online channel into the bricks and mortar activity. This is how we get terms like the following, BOPS, stands for buy online, pick up in store. BODC is by online, delivered to car. ROTS is return online, take to the store. And all of these channel formats are attempts to create convenience and how consumers might want to buy. Let's also consider how stores are rethinking the shopping experience for customers because, as we have previously mentioned, this is a key competitive advantage that brick and mortar stores have over online channels. There is a picture from Kroger, a major grocery chain. Kroger is experimenting with selling clothes like sportswear, and this is a picture of a Kroger store merchandise to do so, they're also moving away from the convenience store formats and gas sales that many locations offer. It must be that they believe that the profit margins and turn on these items somehow justify these moves and changes to the store formats. Or else why would they do this? Home Depot is headquartered here in Atlanta, where Emery is located, and they often speak my class. They offer over a million stock keeping units, or SKUs for sale in their online website and sales have grown. But they also allow customers to pick up in store. And they have found that as much as half of their online sales is fulfilled via these in store pickups. What's even better is that they have discovered that once customers are in the store to pick up their online order, they will often add three to four more items into their purchase. So this pick up rate is a huge benefit for the Home Depot and has helped them to increase store sales. One retailer that has been really slow and rethinking its stores is Wal-Mart. They're were way behind the move to e-commerce channels, and so we now see that they're struggling to catch up, while they have moved towards more buy online and pick up in store channel formats. It's important to understand that this is an extremely difficult thing to do. Store associates are not used to providing curated packages of mixed items. Someone in the store needs to do the picking and mixing of these items to fulfill the order, since the consumer is no longer doing this task themselves. Additionally, think about the storage challenges or all of the orders to be picked up need to be in the front of the store near the entrance to make it easy for consumers to find their items and purchase. But stores are not set up for holding inventory. Every square foot of a store is designed for merchandizing and displaying product. If you've ever been in the back area of the store, there is a real attempt to minimize storage and holding space while maximizing selling floor space. Where you supposed to hold online orders until they are picked up? Well, some Wal-Mart stores have added trailers behind their stores to hold these purchases, but imagine if you live in Kansas and it's winter. Some associate needs to brave the cold to venture out and retrieve the order placed online. These are just some of the challenges that stores face and rethinking their customer experience around the channel benefits that customers want. In order to accelerate their e commerce skills, Wal-Mart has spent billions to purchase companies such as Jet.com, Flipkart and others. Jet.com is a high end retailer that offers two days shipping. Flipkart, Bonobos, Moosejaw are all companies that started online and could benefit from the accessibility that Wal-Mart could offer in their stores. Importantly, their purchase gives Walmart quote, peek under the engine hood to understand how ecommerce firms fundamentally work and where their efficiencies lie. Wal-Mart is clearly pursuing high end segments. Their partnership with Lord and Taylor will give Lord and Taylor dedicated space on the Wal-Mart website, although Lord and Taylor will continue to operate its own website as well. In the future, shoppers ordering from Lord and Taylor.com would be able to pick up in return items at Wal-Marts, 47100 US retail stores. The department store chain will own the inventory and fulfill orders from the site. In 2018, Wal-Mart reached an agreement with MGM Holdings incorporated for the studio to create original content exclusive to Voodoo, which is an online band streaming service that Wal-Mart bought in 2010. Now separately, Wal-Mart is also creating a joint venture for content with Echo, a video platform that specializes in entertainment and commerce content. So who knows? Wal-Mart might be making itself into an entertainment hub. Let's conclude the slide with an observation from Brian Cornell, the CEO of Target. He sees the retail store setting the bricks and mortar as a critical competitive advantage in winning consumers. And I would agree with him that rethinking stores is key to creating new value for customers. It's time for us to close out our discussion on the channel benefit audit. This is an extremely valuable tool for assessing how well your firm is delivering desired channel benefits to customers. The analysis allows us to gain insight into whether a firm is truly majoring on the majors or it is wasting valuable resources on the miners. It helps you to understand what channel benefits are considered major versus minor from the customer point of view. Is it possible for the firm to meet or overtake the competition? Are the products priced right? These were just a few of the insights that the channel benefit audit affords channel strategists and better knowing their target market and illuminating how they could excel in better meeting benefit demands. Finally, the implications for competition. The benefit audit allows you to understand, as a competitor, how much better you would have to be in delivering a key channel benefit like convenience in order to challenge an incumbent. The audit also raises key questions to just how easy or costly it would be to improve upon a desired benefit. Finally, it identifies what benefits were wanted and perhaps not met. And was it fatal? In some, the benefit audit not only gives insight into the channel benefit needs and wants of a firm's current or potential customers, it also allows the firm to identify competitive weaknesses and better exploit them. And that, my dear friends concludes our session on the channel benefits audit
