Changing channels: It's all about what clicks with customers

When Dell Computer Corp. announced in May that it is opening two retail stores, retail industry observers took note. Dell, with $56 billion in revenue this year, was a pioneer in developing the online model of retailing. Brick-and-mortar retailers have followed, creating their own online stores. So why is Dell increasingly interested in the mall? It's an experiment to see if the company can reach a less tech-savvy segment of the market. Marketing experts at the W. P. Carey School of Business comment that Dell's move into a traditional retail setting, like the online ventures of the storefront retailers, is an example of a company experimenting with sales channels. Adding channels helps companies target groups of consumers. What's not clear is whether more channels increase sales.

Tony Beck of Aurora, Colorado, is like a lot of inquisitive shoppers these days. He knew what he wanted to buy, but he didn't know which brand to pick or where he could get it. He went online to do research. What product prompted such conscientious investigation from Mr. Beck? Cat litter. The earth-friendly, organic kind. "Fumes, chemicals, dust: There are all sorts of unhealthy things your cat inhales when she's scratching around in this stuff," Beck says. He was happy finding the product online, but not willing to buy it that way.

"Who wants to pay the shipping on a 20-pound bag of cat litter?" he asks. Besides, kitty can't wait even for FedEx, so Beck picked up his item at PetSmart. His multi-channel litter shopping underscores a reality many retailers are facing. "I think what we'll see in the future is a blending of channels — people searching for information on the web, then buying products in the store," says Andrea Morales, assistant professor of marketing at the W. P. Carey School of Business. "Or, they'll look at a product in the store, but buy online to save money."

"There are segments of consumers who definitely prefer one method of buying over the other," she adds. The challenge for sellers is reaching those customer segments cost-effectively."

Shoptalk

When Dell Computer Corp. announced in May that it would open two retail stores this year, some industry watchers were skeptical the move would be a good one. After all, it was Dell's direct sales channels that propelled the company from start-up status in 1984 to more than $56 billion in revenue today. And unlike many sellers that start out with stores, and then add an online presence, Dell appears to be moving from clicks to bricks.

Well, sort of. Dell spokesman Venancio Figueroa says the company's retail stores will remain true to Dell's direct business model and carry display models but no inventory. "You'll continue to be able to custom configure your system to your exact needs," he notes. "That's why we don't carry inventory. We offer consumers literally thousands of choices" as to what they can get in their systems, and Dell chooses not to "guess what customers want."

Then why add stores? "We're experimenting," Figueroa says, adding that the company's 160 kiosks in malls and airports have "proven to be very beneficial for consumers who want to try before they buy." Such customers haven't always been Dell's target market. Ruth Bolton, a W. P. Carey School professor of marketing, says, "changes in sales channels are very visible in the computer industry," and she uses Dell as a case study for her W. P. Carey MBA students.

"Think about where Dell started out. It was just a toll-free phone number. You had to be pretty savvy about computers to order a computer from Dell," Bolton says. But she adds that, in order to grow, Dell had to expand its customer base. According to Bolton, this imperative pushed Dell online, and early versions of the company's web site tried to match customers with appropriate products through self-select menus where customers would identify themselves as household users, home-office workers, small-business operators or similar consumer groupings.

"It was a way of figuring out the market segment so that they could match you properly to products," Bolton maintains, explaining that people with similar needs often want similar things in computers. Dell's next step, Bolton says, was the addition of online "premier" pages targeted to corporate buyers.

Through Dell's procurement site, Premier.Dell.com, business customers can contract with the computer company for discounts on machines with pre-defined possible features, then offer those choices to the customer's workers shopping online. To further augment company growth, Dell moved overseas, Bolton continues. Now, she notes, the company seems to be targeting less savvy shoppers via 3,000-square-foot retail stores.

Asked if this is the case, Figueroa says, "Short answer? Yes." However, he adds that Dell also hopes to attract those savvy shoppers who just happen to be in the mall and may need a "second or third" computer. Bolton sums up the motivation behind Dell's evolution: "If they'd only sold to geeks, they wouldn't have been able to keep up their dramatic growth." Adding sales channels, however, brings both opportunities and liabilities.

Touchy Topic

One advantage brick-and-mortar retail outlets have is haptic, or related to the sense of touch. Morales maintains that some people have a stronger "need for touch" than others. She also notes, "Some people feel more comfortable asking questions face-to-face," while others prefer the anonymity of online contact. In addition to reaching consumers who need to feel a keyboard's click before the urge to buy clicks in their brains, retail stores offer visibility and educational value.

Figueroa says Dell's new stores will allow sales staff to "really demonstrate to consumers how to use technology in the home." And then, there's the issue of shopping-cart abandonment, which is still a huge problem for online retailers. Bolton explains abandonment as what happens when people put merchandise in their carts online but end up not paying and leaving the web site.

According to a study performed by DoubleClick, a digital marketing firm that provides support and information on e-commerce, 57 percent of shoppers abandoned shopping carts in the third quarter of 2004. "How many times do you see a shopping cart abandoned in a grocery store?" Bolton asks. "Not very often."

Brick-and-mortar stores may not have the abandonment issue of their online counterparts, but companies with both a clicks and bricks presence have ways to lure shoppers who want to get their hands on a product before they bring it home. "About half of our customers visit BestBuy.com before going into the store," says a Best Buy spokesman, Jay Musolf. He adds that the company's in-store pickup for online buys has doubled since 2004.

"What we've heard from customers is that they don't want to wait for shipping, and they don't want to pay for shipping." Does adding more sales channels lead to more sales? In the case of clicks versus bricks retailing, the W. P. Carey School's Bolton says the question is up for debate.

Hiding behind the screen

Consider the heavy shopper, the person who will buy items regardless of what sales channels marketers present. "Say the shopper likes books," Bolton adds. "That shopper would buy books online, in stores, at the airport — it doesn't matter. Heavy shoppers buy through all kinds of channels."

She maintains that the existence of heavy shoppers matters to companies "because if these consumers are heavy buyers to start with, adding channels could be wasted effort." But, what if having multiple channels makes people buy more? According to Bolton, that's what companies need to find out.

If customers "buy more stuff or buy different types of things because they're getting more exposure, then this would be great for firms, and the firms should invest in more channels," she says. The problem is, companies don't know what's really going on with multi-channel shoppers. "Companies don't know if people are heavy buyers to start with or if having multiple channels made customers buy more," Bolton explains.

And she adds that there's really no way for companies to figure it out because most companies collect data separately online versus offline. She admits, however, that she's heard some experts say they suspect multi-channel buyers are simply heavy buyers and, therefore, extra channels won't necessarily add much to a company's revenue. Tell that to Dell. In the past, adding channels opened the company to new customer segments. Will it work again?

Over the counter

Apple Computer does brisk business in its stores, the first of which opened in May of 2001. According to Apple's May 5 quarterly report, retail sales increased 51 percent in the first half of 2006 compared to the same period in 2005. USA Today reported in June that Apple's "stores represent nearly 50 percent of Apple's retail sales." Can channel-adding Dell replicate Apple's retail-store success without replicating Apple's retail-store model?

Apple has in-store "Geniuses," which is what they call their technical support staff. According to USA Today, "100,000 people visit the Geniuses every week." Dell hasn't yet decided whether it will have in-store tech support, according to Figueroa.

What's more, "Apple stores were designed for a 'samples' approach," says Morales. "You can test the sample out front, then when you're ready to buy, they go back into the stockroom and get your item for you." Asked if Dell's lack of on-site inventory could hurt its retail stores, Morales says it might. "Once people have decided they want a product, they generally want to be able to take it home right away," she says.

Bolton believes Dell's lack of inventory will only be bothersome to some "categories of consumers — like my husband, who is very impulsive," she quips. "Then there are people like me who pick Super Saver shipping at Amazon.com because we're willing to wait seven days to get it." Bolton adds: "There is going to be a segment of people that Dell's lack of inventory won't work for. That's why companies have different outlets."

At bottom, Morales thinks Dell's stores might be an interesting testing ground for other retailers to watch. For one thing, the stores might show if "there is a segment of consumers who can get over the hurdle of not buying once they finally get to see products firsthand." She also says they could demonstrate whether a new store's "costs outweigh benefits" or if adding a mega-demonstration site actually is profitable.

Should profitability prevail, the question arises: If retail stores work for Dell, will Amazon.com follow? "We know that customers are shopping across many different channels," says Best Buy's Musolf. They're in stores, doing web research, buying online, over the phone and even in-home from Best Buy's Geek Squad, the tech support troop that does house calls, he says. Such multi-channel action would come as no surprise to Bolton. "That's what channels do," she concludes. "They bring buyers and sellers together."

Bottom Line:

• Consumers are shopping across multiple sales channels, leaving marketers with the challenge of reaching them cost-effectively.
• Adding channels helps companies target specific consumer groups — such as small-businesses or home users — as well as preferences like the need to actually touch products, a need not addressed by direct selling.
• Additional channels don't guarantee profitability or even additional sales. Debate continues on whether multi-channel shoppers are heavy buyers to begin with, or whether exposure to multiple channels impels shoppers to buy more goods.