Scott Cross (Office Depot) Talks Efficient Customer Response, Customer-Centric Marketing, and ROI

I recently interviewed Scott Cross for an upcoming issue of MarketBridge's client email newsletter (Minds Over Markets). Scott is Director of Strategic Campaigns at Office Depot. Scott's a super smart guy who's tried a lot of innovative things and has a firm grasp on the big picture of B2B Marketing.

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AH: Talk a little about how customer data is being used to bring together vendors, manufacturers, retailers and distributors in a more customer focused strategy, and where that’s headed from a B2B perspective.



SC: The manufacturers don’t really understand who is making the decisions and what information is available within the network of their distributors and retailers. A lot of them aren’t set up to understand the information, and don’t have the capabilities to analyze it. So it’s really a green field, and that offers businesses the greatest upside today in the marketplace.



How can you get that data and marry it with the manufacturer? It’s critical because the manufacturer has the expertise when it comes to their products, customers’ behaviors and reactions to those products, and even customer trends when it comes to the features, benefits and requirements. What distributors and retailers have are customer data -- transactional and market basket data -- that completes the picture. So there is definitely room to grow there. For us, that’s where MarketBridge comes in: bringing the manufacturer together with the retailer. 



AH: How has customer insight evolved at Office Depot over the past few years?



SC: Obviously, the retail sector is important for us, but there has been a big insurgence in B2B. But when you look at our customer base, about 80 to 90 percent of our customers are actually businesses now. So we really started trying to understand what drives their buying behavior, and who the decision makers are. In the past we did a lot of qualitative research. Any type of quantitative research was based on surveys, but we didn’t do a lot with customer analytics, database mining, and market basket analysis on the delivery side of the business with our larger contract customers. Most of the market basket analysis was done with the retail customer data. 


So we’ve taken it to the next level by looking at the market basket information such as buying trends and behaviors, and looking at high value customers. Now much of our primary research is done with business customers rather than consumers. MarketBridge has played a big role in helping us understand that, and doing a lot of the modeling on our customer data set.



AH: As the manager around customer insight, what are the three most valuable reports that you receive or would like to receive? Which ones help you make better decisions about customers?



SC: I think ideally there are three reports managers want to see. First, a daily overall sales report that shows how you’re doing by product category and by channel is important, because every morning I can see whether we had a good day or a bad day and why, and the most effective channels from a product perspective. We’re also working to understand that at a customer level.

The ideal state is overall sales by product category and channel, and the second layer would be to look at that by customer segment. It’s the ability to drill into your sales vs. plan vs. last year, find out which categories are up and down, and in which customer segments. 



The third report would be how we are doing against campaigns: how a campaign is performing by product category, customer segment, and by channel. Then, taking it even further, how a campaign is doing at the sales rep level. It’s really measuring the performance at a high level down to product, channel, customer and sales rep levels.



And the next step would be to get this information in real-time, and I think we’re headed in that direction.

AH: Given that, we often talk about the three dimensions of account structure, product market basket and marketing effectiveness reporting. How much importance do you put on those three when you’re managing your business?



SC: Marketing effectiveness is certainly important. You want to understand what vehicles are working and which customer segments are responding to which vehicles. In today’s economy, knowing which customer segments are doing financially better and have a little more money to invest in our products is important. For example, the public sector is definitely a growth opportunity in the current state of the economy. 



Understanding the effectiveness of marketing to those segments is important, but just as critical is the product marketing basket and the account structure. For example, the product marketing basket allows us to understand that customers are buying ink, toner and paper, but they are no longer buying filing products, because budgets have been cut and they can reuse their file folders. So to understand how the product marketing basket changes by segment, by the cyclical nature of the economy and by the overall macroeconomic environment is important. 



And the account structure is equally important. Knowing the difference between a small single-office customer down the street and a multinational corporation with small branches all over the country is key. At the same time, how do these different accounts make buying decisions? Is it the owner of a small business vs. the administrator within a large company? When you are able to marry those three together, it’s really powerful information to use in effectively marketing to your customers.



AH: Who understands customers better, the marketing organization or the sales force, and why?
SC: The sales force understands the customer better when it comes to interacting and knowing the way they customers think. When it comes down to one-to-one relationships, the sales force is number one. That said, the marketing organization is more effective in taking that information and using it to segment the customers into similar groupings, so you can have the same type of effect as with the one-to-one sales effort. So in looking at the overall customer base, how to segment them and market to them, and also which product or offering is most relevant to the entire set of customers, marketing is the most effective.



AH: Switching gears, you’ve got a market research person on your team and plenty of analytics people that are dealing with your core systems. How can market researchers and data analytics people better integrate to drive customer insight? How do you take those two separate tools and merge them together?



SC: Our philosophy is that research and analytics should be in the same group, because data is just another view of the customers, so if you can understand the customer through market research, you are getting a better picture of what the customer looks like. So market research and analytics go hand in hand.



AH: With your CPG background, you saw efficient customer response take off with retail scanner data in the supermarket sector, for example. Now it’s finally happening for B2B, and Office Depot is a pioneer in that.



SC: I do think we’re on the cutting edge. You always feel like it can’t go fast enough, and you’re always feeling behind when you look at retailers and all the information they’ve shared for many years. But it makes you realize there’s a lot of opportunity.

ECR (Efficient Customer Response) or Collaborative Channel Marketing Applied to Tech Marketing

ECR or "Efficient Customer Response" came to the forefront of the consumer channel model in 1992 / 1993. The pioneers of this collaborative supplier / channel approach were the consumer package goods companies and the grocery stores. The idea was that by working together, suppliers and retailers (but more broadly, any type of distribution channel partner could fill in here) could improve total customer satisfaction. An early prospective study by Kurt Salmon Associates in 1993 estimated that savings from a fully implemented ECR approach industrywide would lead to value amounting to 10.8% of the retail price.

More and more, this model is infiltrating technology marketing. OEMs have come to realize that the next big efficiency and effectiveness step will be through true collaboration with partners. This goes beyond "silver," "gold" and "platinum" tier levels, and using 1.5% of COGS for MDF, and goes to system integration, cross-firm teams making collaborative marketing decisions, and a far more integrated supply chain. Companies are doing this today. I don't think they're calling it ECR, but that's what they're doing.

There are three main elements of ECR:

1. Demand side management. This is basically a lot of what MarketBridge has been doing for the past several years in the high tech / channel model. OEMs and partners work together on marketing strategies. This can bring up all kinds of potential conflicts, but also can generate much higher profits by optimizing the 4 Ps across both OEM and channel.


2. Supply side management. This is basically streamlining the supply chain and logistics. Not really an expert here.


3. Information technology. In the early 1990s it was EDI, and now it's gotten a lot more sophisticated. While OEMs and partners definitely don't totally trust each other, they understand how much power is to be gained by merging data--particularly around customer and promotion insight.

The classic case example of ECR is Wal-Mart. Wal-Mart has vertically integrated with its suppliers across all three of the above elements. On the demand side, brands contribute monies for marketing and conduct marketing optimization (mix) with the distribution channel in mind. Wal-Mart has a seat at the table on this as well. Much of Wal-Mart's circular expenses (or all, probably) are funded by the suppliers.

The supply chain story (2) is well known. Wal-Mart works with suppliers to minimize inventory costs and ensure the matching--in near real-time--of demand with supply on the shelves. To enable this, Wal-Mart's ERP systems are tied to their main suppliers, cutting down on inventory and shipping expenses. Wal-Mart has mandated this. These systems are the third element--total information collaboration up and down the supply chain.

The Wal-Mart example also brings up a major concern for ECR, which is that instead of creating a federated model with relatively equal power distributed between supplier and distributor, most of the power has ended up with the increasingly consolidated retailers.

So has ECR worked? Should technology marketers embrace it wholeheartedly? What are the implications for partner consolidation in tech? The best study on this was Corsten and Kumar (Journal of Marketing, 2005, Do Suppliers Benefit from Collaborative Relationships with Large Retailers? An Empirical Investigation of Efficient Customer Response Adoption.)

First, I think it's worth re-creating the model they develop for assessing performance, because it makes sense on its face and should be used as a reference guideposts for tech OEMs or Partners trying to assess whether ECR is a good model for them. It's the picture at the top of the post. Without going through all the arrows, which represent hypotheses, it basically says that suppliers have to have three things to play:

• Transaction-specific investments (investment specific to the collaborative relationship)
• Cross-functional teams (teams to specifically support the collaborative relationship from across the business, including finance, marketing, design, etc.)
• Incentive systems (putting money on the line with members of the above cross-functional team to make the collaborative relationship successful.)

This leads to ECR adoption. At this point, Trust makes the relationship even better, as does choosing to work with retailers that have Good Capabilities. There is an interaction effect here too, where trust and capabilities both impact ECR adoption's impact on success, and impact results directly.

ECR's success is evaluated with three factors--Economic Performance (e.g. are we selling more stuff more efficiently vs. before) Perceived Equity (do both parties feel that the collaboration is fair and no one is "hogging the value) and Capability Development (is the collaborative relationship helping both companies become better marketers.)

After they loaded all their data into this model (read the paper to find out how they got the data, etc.), the basic findings were:

• There is a lot of cyncism and mistrust still floating around between suppliers and retailers.
• Suppliers have definitely achieved much greater economic performance due to ECR. This is true across a broad range of suppliers.
• Suppliers should favor / target retailers that are trusted and smart. These types of relationships have much better outcomes for both parties.
• It is critical to manage perceptions and reality around fairneness. "Negative inequity" can severely damage the supplier / partner relationship.

The implications for tech marketers, on both the OEM and Partner side, are clear--ECR is a great tool and it should be adopted quickly, while using real caution around the points above. Two things I do think are interesting are (1) the fragmentation of the partner industry in tech vs. retail and (2) the significant barriers to entry on the manufacturer / OEM side vs. CPG retail. This, in my mind, will make fairness less of an issue in tech vs. retail. We certainly won't see a "bullying" relationship in tech like we see with Wal-Mart.

One other thing tech needs to figure out is how to implement ECR with the tens of thousands of smaller, less capable partners that serve important niche markets throughout SMB. These partners shouldn't be ignored, so is there a "lite" or "semi-custom" ECR approach for dealing with these smaller partners. This obviously demands significant technology investment and automation of core marketing processes. Of course, I think the answer is yes... We've started down this path already at MarketBridge with our DemandStream approach.