From Sentiment to Insight by Jim Browning

From Sentiment to Insight

How Social Networking Can Support Engaged, Customer‐Centric Retailing A Prospective View August 2009

Sponsored by:

By: Brian Kilcourse and Paula Rosenblum Managing Partners

Table of Contents OVERVIEW ...................................................................................................................................................... 1 The Social Networking Phenomenon ........................................................................................................ 1 Communities of Interest Spring Up Overnight .......................................................................................... 1 Consumer Sentiment as the New Psychographic ...................................................................................... 2 Methodology ............................................................................................................................................. 2 BUSINESS CHALLENGES: Divining Demand ..................................................................................................... 3 Retailers Ask Themselves What Consumers Want To Buy ........................................................................ 3 Consumers Are Mostly Anonymous To Retailers ...................................................................................... 3 The Consumer Has All the Power .............................................................................................................. 4 Retailers Respond as Best They Can .......................................................................................................... 4 THE OPPORTUNITY: Becoming an Engaged Customer‐centric Retailer ......................................................... 5 Social Media: A New Way to Engage ......................................................................................................... 5 Natural Language Processing Technologies ............................................................................................... 6 What Does the Engaged Customer‐Centric Retailer Look Like? ................................................................ 6 But How To Start? ...................................................................................................................................... 7 Getting Beyond The Squeaky Wheel Syndrome ........................................................................................ 7 Begin To Develop A Roadmap ................................................................................................................... 8 THE RISKS: Don’t Start Unless You Plan to Follow Through ........................................................................... 9 Turning Sentiment Into Insight – Is Retail Ready? ..................................................................................... 9 The “Network Effect” As A Double‐Edged Sword ...................................................................................... 9 Avoid Killing the Goose that Lays the Golden Egg ................................................................................... 10 APPENDIX A: Relevant Reference Material ..................................................................................................... a APPENDIX B: About Our Sponsor ................................................................................................................... b APPENDIX C: About RSR................................................................................................................................... c

Figures Figure 1: Difficult to Divine Consumer Demand ............................................................................................. 3 Figure 2: Continually Increasing in Importance .............................................................................................. 5 Figure 3: Social Media Feedback in Context ................................................................................................... 6

OVERVIEW THE SOCIAL NETWORKING PHENOMENON In the late 20th century, quite a bit was written about the isolation inherent in modern day society. Robert Putnam famously documented the decline of what he called “social capital” in his groundbreaking book Bowling Alone1. Putnam observed that while more US citizens were bowling than ever before, the number of people belonging to bowling leagues had dropped precipitously. He used this as a metaphor for the decline of community activities and connections in general (and supported his hypothesis with compelling statistics). Putnam’s view may have been US‐centric, but technology‐dominated, isolated societies are a world‐wide phenomenon. The only question outstanding was “Can humans sustain this kind of isolation, or will they find new ways to connect?” To use Putnam’s vernacular, “How could we re‐build the social capital we’d lost?” The answer to that came shortly thereafter, and was already nascent in community web sites like iVillage.com. Computers and technology, the very things that had fostered isolation would bring people together in ways never imagined before. The web birthed MySpace, Twitter, and Facebook and a new era was born – the age of Social Networking. The viral nature of social networks can enable a single person to trigger thousand or even millions of impressions.

COMMUNITIES OF INTEREST SPRING UP OVERNIGHT Social networks make it possible for people to communicate in a new way. Social media networks such as Facebook hold a mind‐boggling amount of information about a shopper. They not only know that she has clicked on certain content (as search engines like Google and Yahoo do), but also her name, where she lives, her age, specific areas of interest, and even what she looks like. Such identifying information makes it possible for those with common areas of interest to find each other easily and exchange points of view. It helps also consumers find a common voice. For example, Canadian country music artist Dave Carroll posted a video on YouTube to complain about United Airlines baggage handlers. That video was viewed over 4.5 million times within a month of posting. The network effect of social media can cause “word of mouth” epidemics unlike anything that retailers have ever seen before. Initially thought to be the realm of Millennials, by 2009 Facebook reported a 276% growth in 35‐ 54 year old users. This was double the growth rate in 20082. This demographic is important for 1

Bowling Alone: The Collapse and Revival of American Community, Robert D Putnam, Simon & Schuster, 2000

http://www.istrategylabs.com/2009‐facebook‐demographics‐and‐statistics‐report‐276‐growth‐in‐35‐54‐year‐old‐ users/

several reasons, but for our purposes, it matters because it represents the “biggest spenders,” who are the primary target of world‐wide advertisers. In other words, even in a down economy, there’s a lot of potential spending power in those social networks. Along with the potential to give voice to millions of frustrated travelers (as in the video cited above), mining the data available in Social Networks can also give retailers a look into the hot buttons and trigger points of millions of potential shoppers. It can also help us wrap our minds around the sudden shifts in ideas, opinions and taste so prevalent in the 21st century.

CONSUMER SENTIMENT AS THE NEW PSYCHOGRAPHIC Ninety percent of retailers surveyed by RSR in July 2008 cited psychographic assortment localization as a key to their merchandising success. Those retailers believe that along with tailoring their merchandise mix to the demographics of visitors to their web sites and stores, and the geographies within which they reside, understanding their inclinations are also important. Are they empty‐nesters? Suburban? Conservative? Fast fashion adopters? Aspiring to be and act like their parents? Ironically, with all the science at their disposal and with ever increasing mass, retailers are as isolated as the consumers they serve. Even with focus groups, outside databases, and legions of buyers, retailers remain baffled by the vagaries of demand. Suddenly, that data (and a lot more) is available. We have the opportunity to find out how consumers feel. The challenge of course, is making sense of piles of 140 character “tweets,” emails to customer service, and Facebook status updates and wall posts. But even an industry accustomed to drowning in data has been forced to cry “uncle” in the face of this pile of seemingly unstructured snippets. The questions we attempt to answer in this brief report are straightforward: • • •

Can structure be brought to these mountains of unstructured bits and bytes Once structure is brought to it, can it be used? And if it can be used, what are the best uses of it – even in a down economy?

If structure can be brought, and the data can be used, the “sentiment psychographic” can be used to help drive a new, more responsive retail enterprise. RSR calls this “The Engaged, Customer‐centric Retailer.”

METHODOLOGY In prospective reports like this one, RSR pulls together data points from a variety of different sources and bring them together into a new whole. A list of RSR reference documents is in Appendix A. We identify other sources in footnotes within the report itself. We supplement these data points with interviews to add color and substance to our conclusions.

BUSINESS CHALLENGES: DIVINING DEMAND RETAILERS ASK THEMSELVES WHAT CONSUMERS WANT TO BUY Retailers struggle to understand the dynamics of demand. The past is no longer prolog to the future and retailers know it. They fret over under‐ordering and more recently, with a scarcity of working capital, they worry about making the right inventory investments (Figure 1).

Figure 1: Difficult to Divine Consumer Demand Top 3 Business Challenges 76%

Consumer demand is more unpredictable than ever

44%

Consumers demand more localized assortments

37%

Consumer demand has deteriorated significantly Cross‐channel consumer shopping behaviors create new requirements for managing inventory

35%

Trading partners don't have the flexibility we need in supply chain

33%

Credit markets have made it more difficult to finance inventory purchases

22%

Overseas sourcing has exposed vulnerabilities in our supply chain

22%

Quality of products has become more difficult to manage eCommerce has gotten us into more slow moving "long tail" items that are difficult to manage

20% 4% Source: RSR Research, August 2009

Even as demand is less predictable consumer expectations remain high.

CONSUMERS ARE MOSTLY ANONYMOUS TO RETAILERS Most retailers only know consumers through the lens of “the market basket”. Even retailers with sophisticated customer‐oriented business intelligence capabilities joining customer profiles with detailed transactional data to determine “propensity to buy” only really know their customers based on product affinities. Even 21st Century success story Amazom.com takes a product‐centric view of customers; their buy recommendations are based on past purchase history compared to the purchase histories of other consumers who have bought the same item. But today’s consumer wants more. The value of the retailer’s Brand is defined by how well products are delivered at the right price with the right quality, wrapped up in the right information and service, when and where the consumer needs them. In short, consumers want solutions to their lifestyle needs. Today’s consumer routinely uses the Internet as a means to 3

investigate the best value: quality, price, and availability. She is no longer un‐opinionated when she walks into a store. In fact, she’s loaded with facts. Demand is created outside of the store, potentially outside of the retailer’s control. Winning retailers have learned to use the Internet as a lead‐generation engine for their stores by making content about their products and services available on the Internet, as well making it possible for the cross‐channel shopper to begin transacting before entering the store. Retail winners know that their multi‐channel customers are more profitable than single channel shoppers. Savvy retailers have also learned to use internet search data to gain an understanding of what consumers are looking for, and to work with Internet search engines to put messages in front of the people most likely to see their value. But in all of these methods, the data is about retailer actions. A fundamental question remains: what does the consumer have to say? As it turns out, plenty.

THE CONSUMER HAS ALL THE POWER The rate of technology change in the past fifteen years has shaken the fundamentals of retailing to its core. In 2007, retailers reported their biggest business challenge to be “Consumer complaints about their in‐store experience3.” We observed at that time how social networking had set retailers back on their heels and retailers were creating various mechanisms in an attempt to stanch the volume of complaints and criticisms. These “squeaky wheels” have sent a message. Retailers have now set about the work to provide consistent convenience across all their selling channels.

RETAILERS RESPOND AS BEST THEY CAN Retailers now have a variety of mechanisms available to sense the new psychographic of consumer sentiment. They have Facebook and Twitter pages, feedback forms on their web sites, outsourced help desks to speak with frustrated consumers and product review sections of their web site. This still leaves us with the same fundamental question: how can retailers sift through these volumes of unstructured data to find trends? If there is such a thing as “The Wisdom of the Crowd,” is it found in the loudest voices, or behind the noise, in the most persistent sentiments? How can retailers blunt the network effect of negative opinion before it becomes epidemic, and how can they use the network effect in a positive way to create a bias for their products and services? These are the challenges that winning retailers are trying to address through social media.

Technology‐enabled Customer Centricity in the Store, by Paula Rosenblum, originally published by RSAG, March 2007

THE OPPORTUNITY: BECOMING AN ENGAGED CUSTOMER‐CENTRIC RETAILER SOCIAL MEDIA: A NEW WAY TO ENGAGE With traditional media, the dialogue is one‐way and feedback is indirect. Retailers and their partners spend millions advertising their products and services, and feedback comes in the form of success or failure at the checkout counter. “Web 1.0” e‐retailing is fundamentally no different: marketing messages are delivered via the media, and consumers respond by searching and purchasing. “Web 2.0” social media however is fundamentally different. It’s direct and two‐ way; in a word, conversational. It has the potential to return “social capital” to the fabric of retailing – much like conversations at the corner stores of the 19th and early 20th centuries, but on a larger, more high‐tech scale. Of course, as in real life, the best way to have a conversation is to start one. In the past two years retailers have begun awakening to the opportunity inherent in engaging social media to make their products and services known to members of those networks (Figure 2).

Figure 2: Continually Increasing in Importance Perceived Opportunity from Social Networks or Other Forms of Direct Customer Input 2008

2009 56%

46% 33%

31% 23% 11%

Little Opportunity

Some Opportunity

A lot of Opportunity Source: RSR Research, August 2009

The question for retailers is, how engaged should they be and how do they collate and quantify shopper sentiments? First of all, messages from various social media, whether in the form of Facebook postings, email messages, blog entries, or Twitter “tweets” are not data – they are sentiments expressed in plain language. Short of having an army of call center analysts manually codifying such messages, retailers have no non‐technical way of turning that unstructured text into structured data, so that it can in turn be transformed into true insights.

NATURAL LANGUAGE PROCESSING TECHNOLOGIES The good news is that technologies do indeed exist to analyze natural language and contextualize unstructured data from social media allowing us to generally interpret a sentiment as either positive or negative. Pertinent words can be extracted (for example, mention of a product or a store). These extracted and contextualized bits of information can be structured into a data format that can be processed by the retailer’s internal business intelligence systems. Formatted data could be matched to internal databases including the Customer database to help prioritize sentiment from loyal customers vs. “noise” from an amorphous crowd. Based on the nature of the contextualized sentiment, an appropriate alert can be triggered to the appropriate customer service representative.

WHAT DOES THE ENGAGED CUSTOMER‐CENTRIC RETAILER LOOK LIKE? Retailers capture a tremendous amount of internally generated information from their transactional systems (Figure 3). Historically, that information has been used to develop forecasts and merchandising plans (product assortments, allocations, price, promotions) as well as marketing strategies, to develop operational plans (store plans, labor plans), and to track performance (financial and sales information). Retailers also brought in externally generated data to gain market and competitive intelligence, to help them focus their effort on increasing market share and profitability of key categories of products.

Figure 3: Social Media Feedback in Context

Source: RSR Research, August 2009

In the 1990’s, the advent of loyalty schemes and multi‐channel retailing enabled retailers to identify customers individually and engage with them in new ways, focusing marketing efforts on those most likely to take advantage of offers in order to build loyalty, and offer new ways to deliver value to consumers. Some retailers have studied click‐track and search arguments from their own websites and externally generated on commercial websites to better understand what consumers are looking for. But in a faster paced, more unpredictable world, getting closer to customer sentiments becomes a vital tactic for proactively managing customer satisfaction. Measuring sentiment and marring that new data to customer‐specific and market intelligence enables the retailer to quickly assess the impact of its actions. Plus, it creates a new one‐to‐one touch point to the consumer. No longer is the retailer solely dependent on the store clerk to create that “moment of truth” impression on the consumer.

BUT HOW TO START? For retailers who haven’t begun experimenting with the two‐way communications capabilities of social media networks, an obvious question is, “how do we begin?” The question should be answered as part of the retailer’s overall cross‐channel marketing strategy. Issues that need to be addressed include: • •

• • • • •

One, a few, or many social media networks? Which ones? What are the intended objectives of the engagement? Promote the Brand (eg. community involvement)? Product promotions? Special one‐time offers? Employment opportunities? Employee support? Customer support? Special services? Corporate communications? Organizationally, who will “own” social media communication? How will “success” be measured? Will IT support be required? Will there be involvement from internal support organizations? What level of involvement? How will we separate out the “noise”?

GETTING BEYOND THE SQUEAKY WHEEL SYNDROME A second important aspect of any good conversation is in listening. Retailers need to decide up‐ front what they will do with the direct feedback that they get from social media. Like any other data, this new information must be processed. For example, where do employee complaints go to? Customer complaints about products? About services? Suggestions? Corporate inquiries? Just as in face‐to‐face communications, responses to social media can come in three flavors: • •

Competitive listening (not recommended): where the listener is more interesting in his/her own point of view than the other party’s; Passive listening: where the listener absorbs but does not verify the message; 7

•

Active listening: where the listener engages, feeds back and verifies the message and commits to follow up.

In the case of the business use of social media, retailers should develop use cases based on the objectives that have been established for the two‐way communications.

BEGIN TO DEVELOP A ROADMAP As experimentation with social media evolves, retailers need to begin thinking of a future scenario where social media sentiment is interwoven into the business as customer insight. To that end, the long term impact of data derived from social media on people, process, and technology need to be analyzed. One way to approach developing a roadmap is to map these data to the internal business processes that are impacted. That in turn exposes the impact to technologies that support the processes, and the people who execute those processes.

THE RISKS: DON’T START UNLESS YOU PLAN TO FOLLOW THROUGH TURNING SENTIMENT INTO INSIGHT – IS RETAIL READY? As retailers came to learn in the early part of this decade, one aspect of the Internet that can be both exhilarating and alarming is that it is without boundaries, and the potential for rapid scaling is real. The challenge for retailers when it comes to any technology‐enabled consumer capability is that although the developmental stages of the new capability may be very slow, consumer adoption is often dramatic and very rapid. Those retailers that choose to tap into consumer sentiment as expressed on social media networks could find themselves overwhelmed very quickly by trying to respond to every issue raised. Nor should they be tempted‐ not everyone who may comment on service issues or product quality concerns is a customer (or ever likely to be). An inherent problem with the “noise” from social networks, e‐ mails, and other forms of electronic sentiment is that there is no way to rank their importance, and so they tend to be handled first‐in‐first‐out, if at all. Technology should play an inevitable role in resolving the challenge of getting personal with the right customers through the use of sophisticated technology to turn “unstructured” sentiment into usable data that can then be meshed with other internal information to create insights. However, most retailers don’t see the connection between the challenge of consumer unpredictability, the opportunity of creating a single Brand identity across all channels, the use of social media to get direct consumer input – and technology. In another study published by RSR in May 2009, it was revealed that only 30% of retailers (and 32% of winners) rate “helping the company win new customers and retain current customers” as a top expectation of the IT function within their companies.4 Clearly, the industry needs to be informed as to the new possibilities. But one thing should be clear: if retailers aren’t ready to fully engage and process social media feedback that they themselves have triggered, they risk turning what was intended to be a proactive outreach to new communities of consumers into a disincentive.

THE “NETWORK EFFECT” AS A DOUBLE‐EDGED SWORD One of the benefits consumers experience from Social Networks is a sense of control. They can speak to their peers. Those peers empathize. And the answers they receive to complaints and concerns are unscripted, unlike those they receive from highly scripted help desk and customer service personnel. BUT…these same consumers perceive their networks as their own. Social Network Facebook’s attempt to change its privacy rules (and declare all posts – past, present and future to be its property) met with serious user revolt. Eventually the technology provider relented, and softened its stance. But as recently as June 2009, a message found its way into thousands of users’ statuses, and even showed up in the New York Times. 4

IMPORTANT ‐ To ALL FRIENDS. Facebook has agreed to let a third party advertiser use your posted pictures without your permission. Click on SETTINGS up at the top where you see the log out link. Select PRIVACY ‐ MANAGE. Select NEWS FEEDS AND WALL. Select the tab that reads FACE BOOK ADS. There is a drop down box, select NO ONE. Then SAVE your changes. Please pass this around.) On some level, it’s not clear that this was a new policy…but it went viral. Fast. The rapidity with which the Network Effect created this uproar was profound. And it’s this very thing retailers have to watch out for.

AVOID KILLING THE GOOSE THAT LAYS THE GOLDEN EGG We’ve demonstrated in this report that retailers have a profound opportunity to mine and categorize consumers’ interests and turn that data into dollars. But as we pointed out above, consumer trust is tenuous at best. Any overt attempt to go beyond the consumer’s self‐defined boundaries will result in an immediate stanching of the flow of information. Towards that end, we see several imperatives: 1. Make privacy statements explicit and clear: Consumers detest surprises. Make sure privacy policies are easy to read and understand, short, and succinct. While some may say “Consumers don’t realize they are photographed at least 50 times a day…they have no privacy,” one cannot presume on those consumers good will. 2. Always allow consumers to opt in: When a consumer becomes a fan, or a follower, or a member of a retailer’s own community, the retailer should always ask permission to use the information it gathers. Most of the time the consumer will agree (after all, that’s why she’s there, after all), but this type of permission‐based marketing will avoid the negative side of the Network Effect. 3. If a consumer requests a specific response, be sure to answer it: Few things are more frustrating than taking the time to fill out an e‐mail feedback form and receiving an email auto‐reply saying “Thanks for your feedback. We don’t have the time to answer every request, but we’ll look into it.” The writer wonders, “Does this retailer really care about my opinion? Why did these people ask me for feedback when they really weren’t going to do anything with it? I’m going elsewhere.” Even as we focus on aggregating the data we get on consumer sentiment, we also must remember that sentiment is real. And consumers still have many different choices of networks to join and retailers to buy from. Sometimes, disaggregating the data is as important as aggregating it. The mistake of the early 21st century was presuming that self‐service is always an effective proxy for customer service. Retailers now recognize that self‐service technologies have their limits,5 5

and sometimes, person‐to‐person interaction is important. If retailers are to avoid “killing the goose that lays the golden egg,” we must remember the importance of the human touch. At worst, it will put an end to a viral customer complaint, and at best, it will turn an unhappy customer back into an advocate.

APPENDIX A: RELEVANT REFERENCE MATERIAL

We have used data (directly or indirectly) from the following benchmark reports as background for this document. All these reports are available for download from RSR’s web site.

Precision Inventory Management in the Age of Localization: Benchmark Report 2009, by Nikki Baird and Brian Kilcourse, August 2009 Walking the Razor’s Edge: Managing the Store Experience in an Economic Singularity, by Brian Kilcourse and Paula Rosenblum, June 2009 Customer‐Centric Merchandising: Driving Differentiation through Localization, Benchmark Report: 2008, by Paula Rosenblum and Steve Rowen, June 2008 IT and Business Alignment in Retail, by Brian Kilcourse and Paula Rosenblum, May 2009 The Customer Centric Store: Benchmark Report 2008, by Paula Rosenblum, Edited by Nikki Baird, June 2008 The Next Generation of Business Intelligence: Driving Customer Insights Across the Enterprise, by Brian Kilcourse and Paula Rosenblum, August 2007 Technology Enabled Customer Centricity in the Store, by Paula Rosenblum. Originally Published by RSAG, March 2007

APPENDIX B: ABOUT OUR SPONSOR

SAP is the leading provider of application solutions for the retail industry. SAP helps retailers of all sizes to understand, anticipate and inspire their shoppers by providing a compelling shopping experience. The SAP® for Retail solution portfolio provides specific solutions for retail companies in the food, fashion and hardlines businesses. The solution portfolio is built around understanding the shoppers, or Shopper Insight, and consists of building blocks that cover the areas of Merchandise Lifecycle (including planning, merchandise lifecycle pricing and promotion management); Supply Chain (forecast & replenishment, supply chain planning and execution); Shopper Experience (workforce management, customer loyalty and a portfolio of POS solutions); and Corporate Operations (finance and human resources).

Learn more about SAP at http://www.sap.com/retail/

APPENDIX C: ABOUT RSR

Retail Systems Research (“RSR”) is the only research company run by retailers for the retail industry. RSR provides insight into business and technology challenges facing the extended retail industry, and thought leadership and advice on navigating these challenges for specific companies and the industry at large. RSR’s services include benchmark reports covering the state of retailer technology adoption for topics ranging from merchandising and supply chain, store operations and workforce management, to customer‐ facing and multi‐channel technologies. Custom research reports provide more in‐depth views into topics of industry interest, and advisory services help retailers and technology vendors make the most of the insights RSR provides. To learn more about RSR, visit www.rsrresearch.com.

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