Who gets credit for the omni-channel sale?
One of the murkier aspects of omni-channel retailing continues to be "revenue attribution." The challenges assessing proper credit for an omni-channel sale — when it’s partly influenced by offline or online — appear to be leading to under-investments in worthwhile marketing tools in some cases and one channel sabotaging the other’s sales in others.
In a report, Untangling Omni-Channel Retail, Michael Ross, co-founder of software company OrderDynamics (formerly eCommera), summed up the related channel conflicts:
- Research online/buy offline: Do you give credit to online for offline-influence sale?
- Buy online/return to store: Do stores get penalized for online returns?
- Buy on mobile while in store: Is this an online or offline sale?
- Buy online/in-store pickup: Is this a cost for the store or a tool to drive traffic?
- Online order shipping from store: Do stores get credit for sale?
- Offline out-of-stock filled by online shipment: Are stores more incentivized to sell existing inventory in order to get full credit?
Depending on how much credit is given, the role online research plays in physical store purchases may be undervalued, he argues. Vice versa, the role the store may play in supporting online sales, such as in-store pickup and returns, can be undervalued. Perhaps more troubling is the potential "antagonism" between channels that can dis-incent sales across channels. For instance, one side may feel the other is overly-credited when an offline out-of-stock is filled by online shipment.
The myriad of approaches taken to omni-channel sale accounting was evident in a survey conducted last November by Forrester Consulting on behalf of Accenture and Hybris Software.
Cathy Hotka, principal, Cathy Hotka & Associates, said the topic continues to be hotly debated in her conversations with retailers.
"There’s no right way to get to a seamless customer experience, and retailers can’t dismantle what they have and start over … so they’re working on their own hybrid arrangements," Ms. Hotka told RetailWire. "What’s really challenging them is the rise of mobile commerce; they didn’t think they’d have the volume of mobile sales they have."
Dismantling channel silos and implementing a single retail P&L also present challenges.
"People focus on what they get compensated on, and until they compensate stores on ‘overall sales’ I don’t think a single P&L is going to make any difference," said Nikki Baird, managing partner at RSR Research.
Brian Kilcourse, a fellow RSR partner, said not only sales, but how costs of sales are assigned need to be considered. New costs, such as the labor associated with a click ‘n’ collect order, will have to find a way to be calculated.
He added, "Costs (both cost of goods, and operating costs) offset sales in a traditional retail model to deliver operating income (or EBITDA) for each store. When the channels are working together to make a sale, what’s the operating income (revenue less cost-of-goods, less operating expenses) of that sale?"
Discussion Questions
How do you see the challenges around omni-channel revenue recognition disrupting the traditional retail model? What solutions do you see?
The right answer is that the RETAILER gets credit for the sale. And if the omni-channel experience is compelling, the RETAILER wins a long-term customer relationship.
In the fight to find ways to divide sales between online and stores, retailers are losing the war with competitors for omni-channel consumers. This is perhaps the biggest single obstacle for traditional retailers in terms of executing what is required to win today’s omni-channel consumers.
Finance needs to quit worrying about splitting hairs on balance sheets. At the end of the day, if the retailer’s overall balance sheet isn’t profitable, it doesn’t matter who got partial credit for a given sale today.
The “silo” culture—and the sense among brick-and-mortar managers that their companies’ e-commerce channels are their own worst enemy—is part of the reason that stores continue to move slowly at development of a true omni-channel model. It would be worth knowing how Macy’s handles these kinds of issues, since it is already steps ahead of other aspiring omni-channel retailers.
To oversimplify, if an individual store location is taking on the expense of order processing, and shipping goods from its own inventory rather than from an e-commerce distribution center, shouldn’t it be credited with the sale? In the early days of my career, when I bought cosmetics, the charge customers’ “remittance envelope” orders (remember those?) were filled by (and credited to) the branch store filling the order. (Usually the downtown headquarters store … Remember those?) I don’t see this concept being totally different.
As with everything else, revenue recognition has been completely disrupted by online shopping and mobile phones, and most people will suggest that “Big Data” is the answer. We have the ability to learn so much about how and why shoppers make their purchases, and we absolutely should take advantage of that when calculating revenue and measuring cost.
However, it seems to me that the key is having the ability to examine data in a flexible and timely way. Sometimes a question will be answered by looking at how many in-store purchases were made, regardless of online interaction. Others will be answered in different ways. We need to accept the challenges presented by omni-channel shopping while we also search for insights that all this information has made available. Being able to get the right data, in the shortest time possible, is essential.
The good news is that the retailer got the sale. The rest may seem like just accounting geography, but that can be vitally important as the article points out. It can impact resource allocation, employee compensation and the morale of the organization. What makes it more difficult is the myriad of ways a sale and/or a return may take place.
Do I have a solution? No, I wish I did. I see this as an issue that will keep evolving, as how people make purchases keeps changing to a retail world that is brick-and-mortar, internet and mobile.
If a retailer truly believes that omni-channel retailing is their future, then they will need to rethink how credit for sales are allocated across the channels that are used in a sale, whether its operating a single P&L across the company, credit gets split, etc. A siloed approach is a hindrance to this new business model, but it’s up to each retailer to decide for itself, after consulting with its key employee stakeholders, what makes the most sense for its business.
Any retailer worth their salt tracks employee conversions, sales, average number of units, etc., to promote and demote accordingly. While a “We Are The World” approach might sound good to some here, it is highly impracticable for sales professionals. Lose the tracking where “everyone” gets credit and lose those who are by nature competitive and proud of their abilities.
Then you’re pretty much stuck with order fulfillers, which is fine for the bean counters pushing brick-and-mortar stores as distribution centers, but makes the retail shopping experience very dull, boring and unprofitable.
There is actually a pretty elegant solution to all this confusion. It requires a retailer to revamp their P&L structure to prioritize the analysis of merchandising and advertising programs in a way that makes sense with how shoppers behave.
Here it is, for an example retailer with 200 stores plus an online operation:
1. Establish a radius for each physical store that represents the maximum normal distance a customer will travel to a store. This could be a different radius for stores in the city vs. stores in the country. For example, this could be 10, 25 or 50 miles.
2. Establish 201 P&Ls. 200 of these are for each store plus the online sales (and returns) inside the radius around each store. The other P&L is for all the other area combined (outside the radius of any store).
3. Costs and revenue are divided up accordingly.
While there may be a few sales or returns that aren’t counted perfectly in this system, it covers the vast majority of the cases to match what consumers are doing.
A big benefit of this system is that advertising spend inside of a radius (whether online like email or physical like newspaper) can drive sales in stores or online, while being tracked to overall location performance.
Of course stores drive online sales, yet the current financial analysis often ignores this.
Combining online and offline by geography is a big-picture solution that goes a long way to running better merchandising and advertising programs.
Shift away from sales and focus on the fulfillment aspect. A customer can make a sale anywhere from their mobile phone and before they even enter the store and talk to a sales representative.
What matters in this day and age is the fulfillment. Who delivered the product, what store did it ship from, and change the revenue recognition model to the reality of creating reward buckets, instead of trying to artificially attribute a BOPIS sale to a floor sales representative.
Part of me wants to leave it at: “It’s the health of the overall company that matters and everyone SHOULD be working toward that overall health. So the retailer’s goal should be to dismantle the arbitrary boundaries that impede that goal.”
But this article accurately reflects reality. Looked at positively, it’s a question of where/how to allocate resources to make the total channel most effective. Where should ad dollars go? Where should development dollar go?
Looked at with some of the saddest reality of bureaucracy, it’s a question of which groups win or lose within the company. When we consider the total set of channels, there shouldn’t be an issue of win/lose. But there always will be.
Regardless, we must go back to my introduction: It’s the health of the company that matters and everyone should be focused on that.
In particular, comp plans MUST BE restructured to focus on the total output. Intense focus of metrics on each silo is destructive—leading to what Ed Deming observed was the perfectly run company that fails.
The first sentence of the first comment by Chris Peterson says it all. I wish I could endorse his comment more than once.
Obviously if this were an easy question, there would be an easy answer. It’s far from easy.
Retail has carved itself up into silos and unconnected channels over many years. This is not something that can just be undone over night. Nope! While retail is assessing what the future store will look like and how to create enabling customer experiences, all this will need to be hashed out.
In the mean time, I worked for a company once that used a team approach for reward and I have always thought this might work well in retail, especially now when fulfillment is the new sale.
In short, if a sales associate makes the sale, they get the credit. Otherwise the credit goes to the fulfillment site. Then the entire fulfillment site gets to share in the fulfillment credit. Whether it be cash bonuses or other reward, the team wins for pulling together.
And that’s my 2 cents….
Omni-channel retail is here to stay. It’s easier for shoppers and could even encourage them to shop more. It’s a win-win, but will take some effort for retailers to iron out the details.
The solution that I see is keeping track of all the channels utilized within each transaction through clear data collection and management. The channels that consumers browse on, buy from, and the method of pick up are all very important for retailers and can yield insights that could help them price and merchandise more effectively.
Retailers should know what channels were involved for the purpose of analysis, but making the sale and cultivating the relationship are the most important aspects here.
This is a “solution” looking for a problem. If the consumer pays for the product online, it is an online sale. If the payment is received in-store it is a store sale. How much clearer can this be. Revenue recognition is done at the point of sale.
Revenue recognition will be the force that knocks down the silos within the retailers.
The way to have true omni-channel revenue recognition is to have a true omni-channel organization supported by true omni-channel solution platforms. Once merchandise, image assets, pricing, promotions, transactions and customers are shared seamlessly across channels, we will have set the table for organizations to behave in an omni-channel fashion. And we will discontinue the pointless exercise of “allocating” results by channel.
Because there is no true omni-channel platform, channel executives remain at odds with one another for money and resources to support their portion of the business. It is this competition that currently drives channel requirements to allocate sales, returns and other metrics to be mutually exclusive between channels. Only in this way can the channel executives justify their requests for increases in money and resources for their channel.
Not surprisingly, the initial separation of channel management drivers in an effort to stimulate initial growth, with inconsistent (and often competing) performance metrics for success by channel is the single biggest obstacle to the re-unification of the brands under an omni-channel umbrella. Until the board of directors removes the “incentives” for exclusive channel revenue recognition, we will continue to experience inter-channel tensions and continue to fail to achieve true omni-channel behavior in the retail organization.