New Patriot Business Strategy: Sell At A Loss, Make It Up With Volume!

I figured it was only a matter of time before some leftyblog or another tripped over this story, about Twin Cities retail giant Best Buy. The story's been around for a year, although this incarnation in the WSJ is a new one.

Lo and behold, local leftyblog powerhouse New Patriot is on the beat!

But NP writer Mark Desrosiers, usually among the more capable of the New Patriot's stable of writers, completely punks this one.

Full disclosure: I used to work at Best Buy. I know a number of the people involved in Best Buy's research effort. I work in user and customer research.

Desrosiers writes:

In case you were wondering whether our new rich-get-richer culture will have an effect on morals and values, check this out: Analyzing Customers, Best Buy Decides Not All Are Welcome.

Who are the unwelcome customers? Coupon-clippers, bargain-hunters, rebate-scroungers. Some of them are misers; some of them look for loss-leaders because they have a (now entirely justified) vendetta against Best Buy; but I bet most of these "devil" customers just can't afford all that pricey merchandise, yet they want to keep up with the Joneses. In other words, Best Buy now officially wants to shun poor people, while targeting the new legions of moneybags:

Let's stop right here.

Read the article. Find any reference to "poor people". There is none. Indeed, poverty has nothing - jack - to do with this strategy. Indeed, cut right to the chase, this section right here; the customers they're trying to cold-shoulder are those who...:

...buy products, apply for rebates, return the purchases, then buy them back at returned-merchandise discounts. They load up on "loss leaders," severely discounted merchandise designed to boost store traffic, then flip the goods at a profit on eBay. They slap down rock-bottom price quotes from Web sites and demand that Best Buy make good on its lowest-price pledge. "They can wreak enormous economic havoc," says Mr. Anderson.

Best Buy estimates that as many as 100 million of its 500 million customer visits each year are undesirable. And the 54-year-old chief executive wants to be rid of these customers.

Mr. Anderson's new approach upends what has long been standard practice for mass merchants. Most chains use their marketing budgets chiefly to maximize customer traffic, in the belief that more visitors will lift revenue and profit. Shunning customers -- unprofitable or not -- is rare and risky.

Mr. Anderson says the new tack is based on a business-school theory that advocates rating customers according to profitability, then dumping the up to 20% that are unprofitable.

I can tell you from personal experience; Best Buy (like all megaretailers) operates at razor-thin margins. The only selling point Best Buy has is price. If you want to buy from a stereo from a place with amazing service, you go to a higher-end retailer. If you want to buy a CD but don't know what, and need someone to guide you to exactly the right one, you go to a Let It Be or an Electric Fetus. I for one never buy computer stuff from any of the big box retailers: I haven't shopped anywhere but General Nanosystems, a little hole-in-the-wall on University Avenue with better prices than any of the big boxes and better service than anyone in the business [hint: I highly recommend them for everything hardware-related], in five years. But I'm a geek.

Best Buy (and Comp USA, and Circuit City) has two selling points: price and choice. The profit on a low-end computer system is infinitesimal (although computer accessories are highly marked up; Best Buy may literally make more money on the printer cable than on the computer it's plugged into).

So there's a certain imperative to try to draw the customers who won't be a drag on whatever margin the company has, and - this is important - that has only little to do with the customer's income.

Desrosiers continues:

Meanwhile, "To deter the undesirables, it is cutting back on promotions and sales tactics that tend to draw them, and culling them from marketing lists." In other words, banning them.

No.

New Patriot doesnt go out of its way to draw Young Republican readers; it's not the same as banning them.

Not going out of one's way to draw specific customers - customers who are actively trying to short your margin, as opposed to people who don't want to spend a lot - is not "banning" them.

It's a cutthroat world, but not since the Jim Crow days have I heard of a company actually attempting to shun customers as a business strategy. Really, what's going on here?

The article does, in fact, explain the business strategy.

I remember my last trip to Best Buy, coupla years ago, to buy a new CD player. I am not a "Barry" [one of the consumer personae described in the audience], so needless to say I bought the cheapest one of the lot, and was thereupon practically thrown to the ground and kicked about by the well-trained employee because I didn't want to join in their warranty scam.

While Desrosiers has noticed that the extended warranties are indeed, let's be euphemistic, a profit center, I suspect the beating was done purely on principle.

Need I add that this newly upscale operation is still called "Best Buy", and their logo is still a yellow bargain price-tag?

It's called branding. Best Buy has invested tens of millions into getting people to associate them with that yellow tag, the same way New Patriot is putting its effort into associating itself with the picture of Melissa Maerz at the top of its webpage.

Long story short - Desrosiers is being (must not use the P word) unduly alarmist about the implications of this business strategy.

Posted by Mitch at November 9, 2004 04:11 AM | TrackBack