Five Reasons a Retailer Should Look at Its Business from the Bottom Up

Categories Articles, CLV, Finance, Marketing

Unless you’ve been living under a rock – COVID restrictions notwithstanding – you’ve probably noticed that the retail landscape has taken a pretty sharp turn over the last year and a half. More brick-and-mortar retailers have shuttered, and more consumers have adopted new buying habits and expectations. It isn’t much of an exaggeration to say that COVID has completely transformed the current retail landscape.

That transformation wasn’t driven by new products entering the market. What changed was consumer behavior – different consumers’ affinities to purchase different products from different brands through different channels. While it is commonplace to frame these changes in a “top-down” way — by looking at changes in overall unemployment, the overall proportion of sales coming from online channels, total spending by industry, and the like — it is much more diagnostic (and highly complementary) to “flip the script” and frame it from the “bottom-up” instead, understanding how different customer segments have been impacted, and in what ways. Doing so systematically will give us those high-level summaries that top-down analyses obsess over “for free,”but we get so much more by seeing how those high-level summaries come about, and what it all means for business practice.

This isn’t just a COVID thing — the virtue of looking at the world in a bottom-up way goes way beyond that, and should be a regular ingredient driving business operations and strategy. Theta’s own Customer-Based Corporate Valuation (CBCV) is grounded in this belief, offering predictive analytical insights into what each and every current and future customer will do into the future, and leveraging these predictions to make better investment decisions today.

Let’s peel back the onion a bit more, and dive into five reasons why your retail strategy should be bottom-up:

  1. Better Insight into Future Dynamics -The bottom-up perspective of a retailer is an excellent way to evaluate the company and understand future projections. All retailers are judged by their current revenue. Still, it can be better understood when broken down into its underlying customer behavior components: acquisition, retention, repeat purchase preference (referring back to customers) and spend preferences. Understanding these behaviors will give you valuable insight into how your business should operate to thrive with changing consumer trends.
  2. All Ships Point North – Besides the direct benefits for revenue and cash flow projections, it also provides a perfect bridge between the CFO, the CMO, and the rest of the executive team down to the rank-and-file. Your company will see the most success when it can work as a cohesive unit, and that requires collaboration. The executive team needs to be on the same page for that to happen, and an individual-level modeling approach can ensure all functional areas are connected.
  3. People Before Products – To make the most informed decisions, retailers should focus on their customers and not just products. Customer data is one of your most valuable assets, one you can use in everything from product development to marketing efforts. With the customer as the fundamental unit of decision-making, it stands to reason that customers should be the fundamental unit of analytical activities, too.
  4. CLV is the Key – Understanding the differences across customers, particularly in terms of their CLV projections, is a great way to decide where to acquire customers, what products to carry, what services to offer, and how to allocate other resources most effectively across the customer base.
  5. More Control of Business Growth – Products can be commoditized (leading to price wars and other undesirable outcomes), and retailers have little control over them. Retailers, however, can control the number/nature of the customers they acquire and the ongoing retention and development activities they use to engage or activate them. It’s a more effective way to think about managing growth than old-school product-first approaches.