Multichannel Forensics A to Z: Oscillation Mode

Very few businesses have products, brands or channels that operate in what Multichannel Forensics (book, study) defines as "Oscillation Mode".

The automobile industry operates in this mode. You buy a car, then you are strongly encouraged to service your car with the dealership. If that relationship goes well, you'll buy your next car from the same dealership.

You "oscillate" between buying the car and servicing the car.

Business models operating in oscillation mode experience more risk than the average business. If the dealership fails to service your car appropriately, you won't buy your next car there. If you don't like the increases in your monthly cell phone, you won't buy your next cell phone from the carrier. If you don't like the credit relationship with your furniture store, you won't buy furniture there again.

The Oscillation Mode business most execute well in diverse areas like sales, support, and credit. The traditional "Equilibrium Mode" business can overcome a bad experience in one product, brand or channel with a good experience in another.

What are examples of business models you work with that are in Oscillation Mode?

Multichannel Forensics: The Building Blocks

We'll start our Multichannel Forensics series with a quick refresher course.

There are three loyalty modes for every product, brand or channel.

• Retention Mode: When at least 60% of prior year customers purchase again this year (if your business doesn't support a twelve month repurchase period, use a timeframe that is appropriate.

• Hybrid Mode: When between 40% and 60% of prior year customers purchase again this year.

• Acquisition Mode: When fewer than 40% of prior year customers purchase again this year.

We need to classify each product, brand or channel into one of these three modes, so that we can understand the primary way that growth will happen. So many brands are in "Acquisition Mode" and don't realize it, depending heavily on customer acquisition for long-term health.

There are also four Migration Modes that each product, brand or channel fall into.

• Isolation Mode: This happens when the customers in a product, brand or channel do not migrate to other products, brands or channels. For instance, customers who purchase Mens apparel are unlikely to buy Womens apparel. Mens apparel buyers are in "Isolation Mode".

• Equilibrium Mode: This happens when the customers in a product, brand or channel are willing to try other products, brands or channels. For instance, customers who purchase Womens apparel might purchase Mens apparel for their spouse. Womens apparel buyers are frequently in "Equilibrium Mode". This mode is common, and is responsible for all of the interesting dynamics that occur when customers shift from one product line (DVD Players) to another (Blu-Ray DVD Player).

• Transfer Mode: This happens when the customers in a product, brand or channel are actively switching loyalty. Over the next decade, automobile purchasers will actively transfer loyalty from gas-guzzling cars to hybrid cars and other technologies. CEOs need to recognize this mode, and react in a positive way in order to protect jobs.

• Oscillation Mode: Sometimes, customers switch back and forth between products, brands or channels. This is known as "Oscillation Mode". Computer buyers purchase software and peripherals, then switch back to buying a new computer, then switch to software and peripherals, resulting in "Oscillation Mode".

The combination of Loyalty Mode and Migration Mode yield the unique situation a product, brand or channel resides in.

Maybe you are a catalog CEO. If your catalog channel is in "Acquisition/Transfer" mode, your job is to scale back on catalog advertising over time, as your customers won't allow you to grow this channel anymore.

Maybe you are a Merchandise EVP. If your product is in "Retention/Isolation" mode, you thoroughly control your merchandise line. Your customers are loyal to your products, and do not switch loyalty to another merchandise line. You have the potential to be a rock star.

Maybe you are the General Manager of the Online Channel of a Multichannel Brand. If your channel is in "Hybrid/Equilibrium" mode, you have a very interesting channel to manage. Your customers want to shop your store channel, but aren't avid store customers. Strategically, you can influence your customers by the marketing techniques you use. Do you want your customers to shop online, in stores, or anywhere? In many ways, you get to decide!

This week, we'll look at several case studies, examples that help CEOs understand how to manage multichannel complexity!

Multichannel Forensics And Executive Leadership

Recall that there are two key elements in Multichannel Forensics.

First, how well do you retain your customers?

• If you retain more than sixty percent of last year's customers (in other words, more than sixty percent of last year's customers purchase again this year), you are in Retention Mode.
• If you retain between forty and sixty percent of last year's customers, you are in Hybrid Mode.
• If you retain less than forty percent of last year's customers, you are in Acquisition Mode.

Second, what do you customers do after they purchase from you?

• Do they only purchase your products, brands or channels (called Isolation Mode)?
• Do they like to try out other products, brands or channels (called Equilibrium Mode)?
• Do they switch to other products, brands or channels (called Transfer Mode)?
• Do they switch back and forth between products, brands or channels (called Oscillation Mode)?

The combination of modes determines the business strategy for a product, brand or channel.

Let's evaluate Circuit City, as an example. It is well documented that customers shop Circuit City via the online channel, then either purchase merchandise in-store, or purchase online and pick up product in the store.

Retail executives manage channels that have very different dynamics:

• The retail channel frequently operates in Retention/Isolation Mode. In other words, last year's store customers purchase in-store again this year, and are not likely to shop other channels.
• The online channel frequently operates in Acquisition/Transfer Mode. In other words, last year's online customers are unlikely to purchase online this year --- instead, the customer shifts purchasing to the store channel.

When business units operate under vastly different modes, leaders are needed to complement the mode of the business unit.

The leader of the online channel should be collaborative, one who does what is best for the total business. Her bonus structure should be based on her ability to facilitate customer purchases within any channel, not just her channel. The strategic development of her channel should be crafted around the natural behavior of her customer --- to shop in stores in the future.

The leader of the retail channel can be a different individual. Teamwork skills and collaboration may not be as important, because this individual has customers who are not likely to switch to the online channel --- and if the customer does switch, it is only to get information about retail merchandise.

Multichannel retailing is all about exploiting the strengths of each channel. It is not about "sameness", not about replicating the customer experience the same way in every channel.

This holds true for the leaders of each product, brand or channel.

In the Circuit City example, it may make sense to have a very experienced leader manage the online channel. This leader should be well versed at collaboration, consensus, humility, leading through others. This leader should be comfortable with not getting credit for all the good she does to make other leaders look good.

Conversely, it may make sense to have newer executives work in products, brands or channels that are in "isolation mode". In these instances, the leader has control over things, and has fewer moving parts to worry about.

All too often, we assign new leaders to smaller business units, business units with the least "risk". In reality, we should think about putting our most talented leaders in the most challenging roles. Those roles tend to happen in "equilibrium" or "transfer" mode.

Where Are Your Customers Going? Part Three Of Multichannel Forensics

If you didn't fall asleep during the first and second installments of my introduction to multichannel forensics, tonight's exploration may be a bit more intriguing.

Recall that we explored how repurchase rates determine how customers flow through your business.

Repurchase rates above sixty percent put you in 'Retention Mode'. Your business will grow from getting customers to purchase more often, and to add items to their purchases.

Repurchase rates between forty and sixty percent put you in 'Hybrid Mode'. These are fun businesses to run, because you can grow via customer acquisition, by getting customers to purchase more often, and by getting customers to add items to their purchases. Of course, customers have to want to purchase more often, or add items to their orders!

Repurchase rates under forty percent land you in 'Acquisition Mode'. These businesses require leaders who have a singular focus on finding new customers.

Yesterday, we talked about an example where catalog customers were migrating online. Today, let's see how catalog, online and retail customers behave.

Migration Probability Table
	Catalog	Online	Retail
New Customers	3,442	9,350	5,937
Repurchase Rates
Corporate	57%	44%	49%
Catalog	29%	4%	3%
Online	35%	33%	5%
Retail	13%	14%	45%
Repurchase Indices
Catalog	51%	9%	6%
Online	61%	75%	10%
Retail	23%	32%	92%
Total Corporate Repurchase Rate =			46%

The repurchase indices are calculated as the repurchase rate divided by the corporate repurchase rate for that channel. Three primary modes, and one secondary mode appear. Let's look at our example.

Isolation Mode: This occurs when all of the repurchase indices are below twenty percent. This means customers are not likely to cross-shop any product, channels or brands. The retail channel is in Isolation Mode. Retail customers have a low catalog index (6%) and a low online index (10%). The retail index (92%) is not used.

Equilibrium Mode: This occurs when at least one repurchase index is above twenty percent, and no repurchase index is above fifty percent. The online channel is in this situation. The catalog index is 9%, so online customers do not cross-shop catalog. However, the retail index is 32%. This means online buyers are likely to cross-shop retail.

Transfer Mode: Executives leading businesses in transfer mode have problems. Transfer Mode occurs when at least one index is above 50%. Look at catalog. The index for retail is 23%, moving catalog to equilibrium mode. However, catalog moves to transfer mode with a 61% index for the online channel. Catalog customers are likely to cross-shop retail. Catalog customers move their loyalty to online.

The catalog executive is sunk. Her customers migrate online at dramatic rates. Her job is to facilitate this transition. She should not expect her business to grow.

The online executive has a mixed blessing. He is fed customers from the catalog channel, this helps grow his business. Notice that his channel is the number one source for new customers. This means he has that as a growth vehicle. However, his customers cross-shop retail.

Because retail operates in isolation (retail customers typically don't cross-shop online or catalog channels in this example), retail is likely to grow and be healthy. It gets customers from catalog, it gets customers from the online channel. Retail does not send customers to other channels.

Your homework assignment: For the products, brands or channels you are interested in, run the table illustrated above, and consider the dynamics surrounding your business. Where do customers come from, where do the migrate to, which products, brands or channels have the best potential for growth?

Once you learn these relationships, how might you alter your marketing strategy to capitalize on the natural flow of customer behavior that your business exhibits?