Evolve or Die

Written by Craig Wilson

Published — March, 2017

 

It’s not the strongest, smartest, or fastest that survive over time. It’s the most adaptable. Darwin figured out that universal truth a long time ago. Macy’s, Sports Authority, and JC Penny will attest. These are the canaries in the coalmine. With consumer behavior morphing right along with the advancement of technology, mass extinction of legacy business models is accelerating as well.

“There are numerous other 1990s and 2000s brands that didn’t quite make the transition in the relentlessly tough US retail environment of squeezed consumers, fickle and picky teens, smart women, shoppo-phobic men, inscrutable millennials, and a brutal shift to online sales… In March 2016, total commercial bankruptcy filings by corporations of all sizes and other business entities jumped 25% from a year ago to a total of 3,351, with the two biggest culprits being energy and, well, retail.”
—Wolf Street

This notion that old school business models are doomed is corroborated by Business Insider's premium research service BI Intelligence:

“BI forecasts that U.S. consumers will spend $385 billion online in 2016. Moreover, BI Intelligence predicts that number will grow to $632 billion in 2020. This is hardly surprising considering e-commerce's healthy growth. Though the U.S. retail average growth rate in the first half of 2016 was just 2% for total retail, it was 16% for e-commerce.”
 
 

Also driving the shift in buying patterns is the fact that in 2013 only one in six brick and mortar shoppers were influenced by a brand’s website, in 2016 that ballooned to three in six.

Okay, ecommerce sales are growing. E-influence is becoming more powerful. And, traditional retail business models are reeling. These statistics however belie the point. Late adopters, which make up the vast majority of retailers and manufacturers, are prone to a knee jerk reaction to this sort of information by chasing online sales without considering what’s really happening at a behavioral level of the consumer. Wal-Mart is a case in point.

Traditional brick-and-mortar stores, while late to pick up on the shift in consumer shopping to online, have been busy playing catch-up. Last year (2016) retail king Wal-Mart, fighting back against declining foot traffic, announced the closing of 154 stores in the U.S., mostly smaller formats. The company followed that announcement up with its acquisition of e-commerce player Jet.com over the summer. The hope is that the move will kick-start Wal-Mart's sales and help the company return to growth.
— The Motley Fool, January 2017

In contrast, just this February Snapchat filed for a $3B IPO at a valuation of $25B on $404M in revenue. That’s a price to sales ratio of nearly 62. Pricey yes, but investors are bullish because the valuation is based on two things: reach and data.

This is the point.

There are a handful of businesses that are scaling and creating shareholder value uniquely by pairing data driven feedback loops with the ability to constantly and rapidly improve the end user experience. Snapchat is one example. So are Amazon, Google, and Facebook. These are the current stalwarts of Darwin’s axiom: evolve or die. The lesson learned for everyone else, aka consumer brands, is that the power of this pairing allows for iterative experience design and hyper segmentation, which creates a constantly improving user experience for the end consumer. The behemoths are analogs for retailers, but only if the right understanding of their value exists inside the retailer.

Are there then examples in the CPG and consumer brand categories? No. Why? See Wal-Mart’s response above. The reasons organizations are astonishingly slow to evolve are: one, they are as organisms creatures of habit, and two, the acumen within traditional retailers and manufacturers is largely focused on branding, marketing, and sales rather than on the end user experience. The laggards are simply unable to recognize where the world is going or how to get there.

The place the world is going, pardon me, has gone, is to a data enhanced, user-design focused utopia. Call it “Service Design,” where the provider implicitly understands how best to facilitate its constituency’s needs. The means by which product developers, designers, ecommerce user experience designers, retail store designers, supply chain managers, and the accountants and business managers glean such insights is through deliberate user behavior feedback mechanisms. Those mechanisms ideally constructed to provide the information they need to rapidly evolve product, pricing, and service to best accommodate their end consumer. 

There is enormous opportunity across traditional consumer brands. I shop the same place. I buy the same damn thing about every 14 weeks in terms of my outfit. At some point they’re just going to start sending it and leaving it with my doorman and they’ll leave a second box saying send the s#@! back you don’t want.
— Scott Galloway, Professor of Marketing, NYU Stern, Co-founder L2

The problem for retailers is their business models are stuck in a traditional branding, marketing, and sales structure. Traditional blanket advertising, brand positioning approaches, and selling strategies are dying a rapid death and being replaced with a combination of four elements: (1) human behavioral science inputs; (2) big data analysis; (3) ad targeting (Ad targeting is personalized advertising, aligned as accurately as possible to the needs and desires of an individual consumer); (4) rapid, iterative, user experience design.

Technology is enabling the latter three disciplines, while the first, human behavioral science, is where the biggest leap forward is actually occurring. In the context of commerce, the leap is to operate based on a clear understanding of why, when, and how a customer will buy based on what you do as a brand. Self-aggrandizement as a business model is irrelevant today. Consumers are being served more and more based particularly on their set of needs. If your business model is focused on self, if it’s naval gazing in its structure and output, and it’s promoting benefits and features of your product, but not deeply understanding its customer’s circumstance and need state at every point of interaction, then your customer will seek “service” elsewhere.

Macy’s didn’t go out of business because shoppers are moving online. Macy’s bankruptcy is a result of their business model being dull-witted (dull-witted—adjective: slow to understand). Macy’s was unknowing of its shoppers’ habits, needs and wants. As the landscape reshaped, Macy’s doubled down on what brought them success in the last century. Ignore the canaries at your own peril. Lesson learned: Build an adaptable business model based on deep understanding of the behavior of the constituency you serve.

To learn more, read The Compass and the Nail here.