Almost every retailer out there will tell you they need to be more innovative, and that this is hard. Retail has long been an industry focused on buying low, selling high, and optimizing everything in between. Shifting to meet an expectation of providing content, services, experience, engagement and more – this is a big shift, and not easily accomplished. Some retailers – vertically integrated brands, or those with private label merchandise – might be good at product innovation, but that is a far cry from process innovation – and that is a large part of what retailers need right now, as they try to make the shift to be more relevant to consumers.
The thing about innovation, though, is that while it can sometimes have an aura unapproachability – only the coolest kids get to do it, it’s the rarified air of the most future-y of the futurists – the reality is, it’s a process, just like any other. It can be broken down into discrete steps, and those steps can be refined and optimized to produce a desired outcome.
Innovation – the act of creating new engines for business growth – has actually long been studied. Doblin, an innovation strategy consulting firm, identified ten distinct types of innovation in 1997. They broke the ten types up into three higher-level kinds of innovation: configuration, offering, and experience.
Retailers have been laser-focused on the latter, particularly the last identified type of innovation out of the ten: customer engagement. This is in direct response to shifting customer expectations, which in and of itself is not a bad thing. However, there are nine other innovation types out there, and with retailers so focused on just customer engagement, they are leaving a lot on the table. In fact, I would argue that the tenth innovation – this customer engagement – would be more powerful, and retailers would have more options to create innovation there, if they spent more time looking at the other nine first.
That’s not to say that retail has not been disrupted by companies making use of the other nine areas of innovation, but I think it is interesting to see just how many examples in the other nine come from upstarts, rather than from established retailers. Retailers like Walmart and Nordstrom are acquiring their way around this problem, by going out and buying some of these upstarts, but doing so can put a big strain on corporate culture and risk muddying the retailer’s brand in the process.
It’s like trying to transplant a tree: you can buy an older, bigger tree that is already well-established, but if you move it to a new location, the shock can often slow its growth and endanger its health in a way where, if you had just bought a younger tree and let it grow, it would end up bigger than the older tree after just a couple of years. When retailers acquire upstart brands or technologies, they’re often acquiring the same shock and risk as buying that larger tree – and might’ve gotten to implemented innovations faster by focusing on growing them more organically, than they will in trying to graft someone else’s innovation onto their enterprise.
Here are the nine other types of innovation traditional retailers are currently leaving on the table, or trying to buy:
- Profit Model – innovations around how the value to customers is ultimately collected. Think Rent the Runway, where consumers get access to luxury dresses and accessories in a rental model, rather than the outright selling of products, or Toms and Warby Parker, with their buy one, give one approach to the market.
- Network – innovations around how companies leverage other companies’ offerings to create their own unique ones. Think pretty much an Instagram brand, which reaches a highly targeted set of customers in a unique way, and pretty much operates a contract supply chain, rather than investing in the assets themselves. The product design might be owned by the company, but not the assets involved in making the products or getting them to consumers.
- Structure – innovations around how the company is structured. I haven’t really come across a lot of retailers innovating here. More often, I see retailers trying to protect their existing organizational structures from the disruption caused by innovation in other areas. You could probably look at Zappos as an early example of a retailer trying out organizational innovation, with things like paying new people to quit and rewarding customer service reps who went to heroic efforts to help customers on the phone. I’ve always thought of organization design as an outcome of the strategy – you should organize to support the execution of your strategy – so I have a hard time seeing how a retailer could stake an organizational claim to innovation without it actually being the outcome of a different type of innovation.
- Process – innovations around how a company does its work. I would look back to Instagram brands, or companies like Dollar Shave Club, who didn’t necessarily invent a new product or a product with breakthrough performance, but disrupted the shaving products industry by going to market completely differently, by eschewing traditional distribution or marketing.
- Product Performance – innovations that focus on new products that change the game, or on breakthroughs in product design for existing products. Honest Company is a good example here, not necessarily that the products were breakthroughs in design (many customers took issue with the efficacy of things like the company’s sun screen, for example), but were a breakthrough in terms of identifying strong preferences among consumers for more organic, more “natural” ingredients, and moving to meet those needs. A lot of product innovation these days seems to be coming from niche or boutique brands that have identified a gap in the market, and have organized to fill it.
- Product Systems – innovations in the complementary products and services that come with a product. Product system innovation is one place that is hitting the grocery industry hard, as meal boxes have combined with Millennials’ preferences for ease and convenience – and healthy ingredients – when it comes to eating. Big grocery chains have moved to take on boxed meal upstarts, either by offering their own subscriptions, or increasing their in-store focus on prepared meals and meals-to-go.
- Service – innovations in how you support your offerings. This is a place where retailers, seeking to enhance customer engagement, should also seriously consider. Some traditional retailers, like REI and Petsmart, have made big investments here, by supporting the whole of customer needs, rather than just focusing on products. Best Buy also put a stake in the ground here with their acquisition of Geek Squad.
- Channel – innovations in how products are delivered. Amazon is the original upstart here, and continues to disrupt the industry in how it connects consumers to products, with Alexa, Amazon Go, Amazon Prime Now, Amazon Flex… The list goes on and on. Innovations here have left traditional retailers reeling as they have tried to keep up.
- Brand – innovations in how you present your company to the market. Brandless is the quintessential example here, a company that literally goes to market with no branding, other than promising great products at great prices, with no marketing fluff to get in between.
The last innovation type is the one retailers have been so focused on: customer engagement: innovations in how you foster customer interactions. The challenge with focusing on this type of innovation as your primary one is that you’re only thinking about one aspect of customer expectations: how they engage with you as they buy products. This is still a product-centric way of thinking – that your goal as a retailer is to sell more stuff. The reality of the disruption in consumer expectations is that they no longer expect retailers to simply be a way of connecting consumers to goods – the buy low, sell high, and optimize everything in between way of thinking.
Consumers expect retailers to be partners in making their lives better, even when the interaction they’re looking for is low consideration for a low value purchase. Even in that case, consumers expect retailers to at least get out of their way and make the transaction as quick and painless as possible, which is why companies like Dollar Shave and Harry’s took such a bite out of a pretty long-established category.
Consumers also expect retailers to make the world a better place, which is why upstarts have been able to exploit innovations in profit model or product design to meet niches of consumer needs that established companies could’ve easily identified and did not.
The Bottom Line
Customer engagement is important – you’ll get no argument from me there. But it’s not the only thing. Brands like Glossier that approached the market through the Instagram network are able to create completely new forms of customer engagement not because they set out to design a new type of customer engagement, but because it was a natural outcome of how they approached the market.
Retailers who are struggling to be more innovative should look beyond just innovations in customer engagement. They may find their wider exploration of innovation ultimately leads to new ways of engaging with customers, anyway.