Now, here's a point that I don't want you to miss. And that is that an end user's valuation for channel benefits can and often does differ across consumers and purchase occasions. This means that the same benefit can have very different weights for the same consumer, depending on how she is consuming or using the product. And the same benefit can be valued very differently between, say, me and you. This is why it is critically important that our channel design and strategy thoroughly understands which channel benefits are valued by our customers and by how much and when. So by now, we've established the customers way in value channel benefits differently and on different purchase occasions. Let's now consider a question for today that applies what we have just learned. What channel benefit is a supermarket's best weapon against online retailers? Supermarkets everywhere are realizing that along with the ability to provide products immediately to customers, which is something that most online retailers cannot do. The number one channel benefits that customers are seeking is fresh produce. Research has shown that fresh produce drives a consumer's choice of which grocery store, too frequent. Fresh produce also carries substantially higher profit margins than canned or frozen food items. This is why many retailers are putting in crisping stations and overhead rain showers to ensure that the produce looks fresh and perky. Many retailers are merchandising these products in a way that looks more like an outdoor farmer's market with rusty cases etcetera, than a sterile grocery store. Walmart has individuals who will touch the fruit and take out any fruit that is over right. It's worth noting that despite all the hoopla in the news about online food and grocery sales, those volumes still represent a tiny fraction of the grocery market. Groceries are predominantly bought in stores, and this is a key competitive advantage that brick and mortar has over e-tailers. More broadly, what we need to understand is that this emphasis on fresh produce is fundamentally about the sale of channel benefits, which represents a significant competitive advantage in today's ongoing retail wars. Let's press on and put what we know to use with a case example. A bricks and mortar grocery retailer is considering whether or not it should add an online shopping channel for its customers. Or should it save the money that would need to be invested to create an online channel and instead open a new store location. So this is not about what the product line should be, but how customers shop for groceries. The retailer commissions some marketing research to be done on its major customer segments, and the research indicates that there are three segments in their current customer base. They nickname one segment efficiency seekers, and these comprise close to 40% of all of their customers. 43% of their customers care about low prices and like to make comparisons. And the smallest segment, 18 percent are brand loyal, and look for those brands when they purchase. So these are the three segments that comprise the current customer base. Let's unpack a bit more detail about how these segments like to buy. This chart lists the range of channel benefits that each segment desires, and the different valuations for these benefits appear in the columns for each of these groups. Pause here for a minute to review this and think about where the key differences lie between the three segments. Keep in mind that at the time of this research, no groceries were purchased online and that's been widely true for online grocery shopping for the past few decades. This means that those who are heavy Internet users would have to conjecture as to whether they would purchase groceries online, given their existing shopping habits. So which of these segments do you think are most likely to use an online purchasing channel, if the store were to offer one? Take a moment now and jot down your answer. In class, many students make the argument that those who care about a fast, efficient buying process would like an online channel because it would allow them to find their products they want quickly and make it easy to check out. But one thing that works against this group and makes this recommendation not very strong is that this group really wants to see and touch the products. So this makes it unlikely that this group will adopt an online channel. And in fact, this is the chief reason why we have not seen more online grocery purchasing over the past 20 years. People like to touch and feel products, particularly those with a shelf life like produce, baked goods, meats, et cetera. Now, let's consider the low price segment. Although, this group values the ability to compare and choose a variety of products, and they like to plan their grocery needs. They highly value the social interaction. Which means that they like being in the store. This works against the argument for adding an online channel. When we discuss this in class, there's always a large number of students who say that the grocer should target the brand loyalists. The arguments for this or that they value the ability to quickly review and select products and would love for those products to be delivered to their home. Another argument for this group is that a large portion of them are heavy internet users and would feel comfortable purchasing online. Another argument for offering an online channel that always comes up in class is that the retailer needs to be a first mover in technology adoption. By leading the way other retailers will follow, an online shopping for groceries will become a normal thing. This is a common reaction, particularly because there's a tendency to want to pursue the next new and shiny thing. But you know, there's always a sizable group of students in the class like 30% that will say that the retailers should not offer an online channel, and you know what? They are right. Here's the rationale. Even though the brand loyalists value home delivery, you need to take into account the segment size, recall that this segment is the smallest of the three segments. Only 18% of the grocers customers are brand loyalists, compared to more than twice that for the other segments. Efficiency seekers represent 39% of the groceries customers and low price comparison customers represent 43%. So when we consider that only 18% of the customers are brand loyalists, the percent who are heavy internet users 40% cause the segment size to drop even more. Now, the size of the relevant target market is only 8% of the groceries current customers. Put differently, this means that 92% of their customers will not value an internet channel. And that is the conclusion that this grocer reached based on the market research regarding their customers' preferences for channel benefits, the grocer opted not to offer an internet channel. Thus, it arrived at this decision by understanding how its customers want to buy, and this is a learning point for us. Every new and shiny technology that comes along does not have to become the firm's next strategic priority. Instead, this retailer invested its money in a new location and likely got a much better return on its investment as a result.
