Acquiring new customers is expensive for any retail business. Most of us are familiar with the Bain study that says it is five to seven times more expensive to acquire a new customer than it is to sell more to an existing customer. So if you are spending $1M on a mass promotion to generate $15M in sales, by focusing instead on selective customers built on our Ergenomics’ Power Index, you may be able to cut your ad spend in half and achieve the same sales results. This frees up more money for you to spend on other promotions, or simply drop to the bottom line. The old Pareto rule is proven out time after time in retail. For most retailers, they will obtain approximately 70% of their sales from just 30% of their customers. Yet, most retailers spend their advertising equally against every customer. For most retailers, this means that they are likely spending more in advertising to these customers than they get back in sales.
At Ergenomics, we help you to segment your customers and model them so that we can create incremental sales dollars for you. We look at their shopping frequency, spending, and basket items to help you decide how and where to best spend promotional dollars most effectively.
Ergenomics has developed a Power Index that allows clients to understand how certain SKU’s, business lines, and customer segments truly impact profitability. That is, our approach and solution can drive business intelligence to a level that is simply not attainable otherwise. Our Power Index is a robust tool that helps you get all of the information you need quickly and efficiently. The foundation for developing this solution is in the calculation and application of the Power Index. This index has its roots in Game Theory and uses some of the algorithms inherent to this science. Recognizing that each retail customer is a player in their unique game enables the Principles of Game Theory. Game Theory states that if there is a game, there are rules, players, and groups. If a player wants to join the group, that player wants to gain positively from this alliance. For the group to let this player in, they need to benefit from the addition. Constantly changing rules are applied in a timely manner to the right game (retail customer needs), the right player (retail customer), and the right group (product offerings). A retail customer will not buy a product if the need is not recognized. A company will not sell unprofitable products to generate long-term losses. Ergenomics is the first to apply the principals of Game Theory specifically to the activity of crossselling. We have developed our Power Index to complete the science.
Three main differentiators result from our position:
- We offer the only algorithm tailored to enterprise-wide cross-selling. Our Power Index allows our clients to identify on a per customer and per product level (i.e., what each customer is most likely to need, what each customer is most likely to buy, the ranking of all products by the propensity of each customer’s needs and wants);
- Using our Power Index, we have the ability to show our clients the importance of each product and teach our clients to use this information to improve their customer relationships (i.e., how important is Product A to the overall relationship, what is the relative importance of all products against each other);
- We also have the flexibility to apply our process to any natural segment. This science can be applied at the enterprise level, at the business line level, against customer segments, regionally, or at any other segmentation that the business needs this intelligence or sees potential ways to benefit from the analysis.
In our application, rules work both ways so that the desired effect is that the customer and company mutually win. The customers get appropriate offers, and the company sells and promotes the wining coalitions of profitable products. The result is that even when product profitability does exist, figures can be grossly misleading for some products because of the intermingled nature of a retail relationship. Winning coalitions are defined when a product forms a winning mix if it adds to the sustainable profit of the mix while not sacrificing its own margin. When this condition holds true, the product is called a “swinger” and is therefore pivotal for a given mix. The definition above is used to derive the probability of a swinger product as the ratio of all relevant swinger product mixes to the total number of coalitions or permutations that include the product under consideration. By calculating each Power Index we determine where each customer is in the completeness of his or her relationship with the company and identify the next products that should be offered to each client. The algorithm is not limited to one or two selected retail products, rather it applies across the entire spectrum of products and services. For each available product, the Power Index enables us to rank the priority of offerings.
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