Designing Digital Retail (Part 2): Customer Experience Strategy

This is the second in a series of articles that explore how traditional retailers can move through the challenges of digital transformation. You can see all the articles in this series here.

The next post will explore how to grow digital capabilities and culture.

The strategic importance of customer experience

Retail customer experience is changing fast. More than half of all internet product searches start on Amazon (Alaimo, 2018) and social media platforms such as Instagram are gearing up to become a sales and checkout platform for brands (Instagram 2019). As digital technologies deliver new and better experiences, customer experience is fast becoming a core area upon which retailers are competing.

As digital technologies deliver new and better experiences, customer experience is fast becoming the core area upon which retailers are competing.

A study by Gartner found over 80% of marketing leaders expect their organisations will soon be competing mostly or entirely on customer experience (Gartner, 2019). The study also found that in 2018 75% of companies increased their investment in customer experience technology investments. Research shows that positive customer experiences results in revenue enhancements. PwC, for example, found that it supports a price premium of between 7% and 16% on products and services, and is an important factor in buying decisions (Clark & Kinghorn, 2018).

So what is good customer experience?

Customer experience in retail has been studied in depth. Lemon & Verhoef (2016, 74) define it as the “cognitive, emotional, behavioral, sensorial and social responses to a firm’s offerings during the customer’s entire purchase journey”. Customer experience emerges from three types of communication and encounter between customer and retailers (communication encounter), staff or service applications (service encounter) and use or products or services (usage encounter), (Payne et al, 2008). Verhoef et al. (2009) developed a general model of customer experience, identifying nine different independent variables that affect customer experiences. These were social environment, service interface, retail atmosphere, assortment, price and promotions, retail brand, customer experiences in alternative channels, and previous experiences with the company. These factors were moderated by both situational factors (such as type of store, location, and season) and consumers’ orientation (e.g. hedonic or utilitarian).

The relationship between Customer Experience and Technology has also been studied in depth. Research has found several perceived characteristics of retail technology that affect use and adoption, including perceived usefulness, perceived complexity, perceived enjoyment, attitudes about control and convenience, and perceptions about personalisation and cost efficiency (Clodfelter, 2011; Wang 2012; Adapa et al. 2020). Research into the effects of technology channels on customer loyalty shows that customer loyalty is affected by customisation, contact interactivity, care (the perceived care that a retailer has put into the customer experience), community, convenience, cultivation, choice and character (Srinivasan et al. (2002).

Multichannel vs Crosschannel vs Omnichannel

One of the key customer experience trends within the retail industry over the past twenty years has been the proliferation of channels through which the customer is able to interact with the retailer. This has resulted in the emergence of three new concepts which are often used and misused within the retail industry: multi-channel, cross-channel and omnichannel. Beck and Rygl (2015) conducted a literature review of these concepts and arrived at the following definitions:

“Multi-Channel Retailing is the set of activities involved in selling merchandise or services through more than one channel, whereby the customer cannot trigger channel interaction and/or the retailer does not control channel integration”.

In other words, while there are multiple channels through which the customer can interact with a retailer, these channels are separate, siloed channels and lack integration of information or activities.

“Cross-Channel Retailing is the set of activities involved in selling merchandise or services through more than one channel or all widespread channels, whereby the customer can trigger partial channel interaction and/or the retailer controls partial channel integration”.

Cross-channel retailing is one step on from multichannel retailing, in which there is some cross-channel integration, leading to a more joined-up experience for the customer and joined up activities of the business.

“Omni-Channel Retailing is the set of activities involved in selling merchandise or services through all widespread channels, whereby the customer can trigger full channel interaction and/or the retailer controls full channel integration”.

Omnichannel retailing describes a situation in which the business has achieved total integration of all channels, and total integration of all underlying operations, so the customer can switch seamlessly between channels and devices, enjoying a single interaction experience with the retailer.

The value of integrating channels

Research has found that online and offline channels do not exist as isolated channels as there are reciprocal effects between offline and online channels on brand image (Davis & Buchanan-Oliver 2000; Kwon & Lennon, 2009). Retailers have therefore faced a choice between attempting to combine or separate channels. The aim of separating channels has been to focus channels on separate target groups and markets, attempting to avoid overlap, motivated by a fear that different channels may cannibalise each other (Schramm-Klein, H., and Morschett, (2005). However, subsequent research (Kauffman et al 2009) has found these fears can be mitigated with an integrated approach to customer relationships management and cross channel promotions. Other studies found that small initial effects of new channels on existing channels are offset by an overall increase in revenues for the business (Avery et al 2012).

There is a host of research showing that well-integrated channels positively effects customers evaluation of a firm (Emrich et al. 2015, Herhausen et al 2015), customer loyalty (Frasquet & Miquel, 2017), overall satisfaction (Seck & Philippe, 2013) and leads to competitive advantage (Wakolbinger & Stummer, 2013). Research has found that customers who use both online and physical channels have approximately a 30% higher lifetime value than customers who purchase from a single channel only (Rigby et al., 2016; Krueger, 2015). Other research has shown that separate channels result in ‘silo effects’ in which lack of integration between channels causes costs to the business from duplication of operations and inventory, poor customer satisfaction and replication of investments. An omnichannel approach avoids these silo effects.

There is a host of research showing that well-integrated channels positively effects customers evaluation of a firm (Emrich et al. 2015, Herhausen et al 2015), customer loyalty (Frasquet & Miquel, 2017), overall satisfaction (Seck & Philippe, 2013) and leads to competitive advantage (Wakolbinger & Stummer, 2013).

The Multichannel integration model (MCIQ) proposed by Sousa and Voss (2006) presents four different dimensions of channel integration that predict customer satisfaction and customer engagement, which in turn affect repurchase intention. The four dimensions are as follows:

- Breadth of channel-service choice: The degree to which customers can choose alternative channels to interact with a service, or can achieve any task through a single channel.

- Transparency of channel-service configuration: The degree to which customers are aware of the different channels offered by a retailer, and the extent to which they are aware of any service differences across those channels

- Content consistency: The degree to which content such as price, product specs is consistent across channels, and the degree to which customer receive consistent responses to enquiries is constant across channels

- Process consistency: The degree to which there is consistency of process across channels, including look and feel, customer actions, delivery process and speed.

There is strong evidence that an omnichannel approach brings greater value to the business. Therefore there has been a strong move from siloed multi-channel retail towards a cross-channel or omnichannel retail strategy (Verhoef et al, 2015). However, the transition is particularly challenging as it requires an orchestrated transformation of sales, marketing and operations, and the underlying technology infrastructure.

To conclude…

In order to compete in the digital age, traditional retailers must explore how channels can be integrated to remove friction and improve the quality of customer journeys. They must explore how their channels can facilitate goal-oriented behaviour, not erect barriers to achieving customer goals (Cook, 2014).

In 2016 Walmart began to offer ‘order online — pick up in store’ services (Lindner, 2016), a practice which has since been offered by many other grocers. This has begun to foreshadow an era in which the physical stores owned by retailers are gradually repurposed to become fulfillment centres for digital-first customer engagements. Designing digital retail therefore requires understanding how the current assets of the business can be combined with new digital capabilities to create compelling omnichannel customer experiences. In future posts, I will explore how traditional retailers can make this journey to become customer-centered organisations.

Next Up: Designing Digital Retail (Part 3): Growing digital capabilities and culture.

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