One of the foundational principles of the Web 2.0 philosophy that Tim O’Reilly stresses relates to “self-improving” systems that get better as more and more people use them. I try to keep a watchful eye out for business books on this subject – books about companies who know that data is their business; books like the somehow unsatisfying Competing on Analytics, and a new one I’m looking forward to reading: Data Driven: Profiting from Your Most Important Business Asset (if you’d like to buy it for me… OUseful.info wishlist;-).
So as part of my summer holiday reading this year, I took away Scoring Points: How Tesco Continues to WIn Customer Loyalty, a book that tells the tale of the Tesco Loyalty Card. (Disclaimer: the Open University has a relationship with Tesco, which means that you can use Tesco clubcard points in full or part payment of certain OU courses. It also means, of course, that Tesco knows far, far more about certain classes of our students than we do…)
For those of you who don’t know of Tesco, it’s the UK’s dominant supermarket chain, taking a huge percentage of the UK’s daily retail spend, and is now one of those companies that’s so large it can’t help but be evil. (They track their millions of “users” as aggressively as Google tracks theirs.) Whenever you hand over your Tesco Clubcard alongside a purchase, you get “points for pounds” back. Every 3 months (I think?), a personalised mailing comes with vouchers that convert points accumulated over that period into “cash”. (The vouchers are in nice round sums – £1, £2.50 and so on. Unconverted points are carried over to the convertable balance in next mailing.) The mailing also comes with money off vouchers for things you appear to have stopped purchasing, rewards on product categories you frequently buy from, or vouchers trying to entice you to buy things you might not be in the habit of buying regularly (but which Tesco suspects you might desire!;-)
Anyway, that’s as maybe – this is supposed to be a brief summary of corner-turned pages I marked whilst on holiday. The book reads a bit like a corporate briefing book, repetitive in parts, continually talking up the Tesco business, and so on, but it tells a good story and contains more than a few a gems. So here for me were some of the highlights…
First of all, the “Clubcard customer contract”: more data means better segmentation, means more targeted/personalised services, means better profiling. In short, “the more you shop with us, the more benefit you will accrue” (p68).
This is at the heart of it all – just like Google wants to understand it’s users better so that it can serve them with more relevant ads (better segmentation * higher likelihood of clickthru = more cash from the Google money machine), and Amazon seduces you with personal recommendations of things it thinks you might like to buy based on your purchase and browsing history, and the purchase history of other users like you, so Tesco Clubcard works in much the same way: it feeds a recommendation engine that mines and segments data from millions of people like you, in order to keep you engaged.
Scale matters. In 1995, when Tesco Clubcard launched, dunhumby, the company that has managed the Clubcard from when it was still an idea to the present day, had to make do with the data processing capabilities that were available then, which meant that it was impossible to track every purchase, in every basket, from every shopper. (In addition, not everything could be tracked by the POS tills of the time – only “the customer ID, the total basket size and time the customer visited, and the amount spent in each department” (p102)). In the early days, this meant data had to be sampled before analysis, with insight from a statistically significant analysis of 10% of the shopping records being applied to the remaining 90%. Today, they can track everything.
Working out what to track – first order “instantaneous” data (what did you buy on a particular trip, what time of day was the visit) or second order data (what did you buy this time you didn’t buy last time, how long has it been between visits) – was a major concern, as were indicators that could be used as KPIs in the extent to which Clubcard influenced customer loyalty.
Now I’m not sure to what extent you could map website analytics onto “store analytics”, but some of the loyalty measures seem familiar to me. Take, for example, the RFV analysis (pp95-6) :
- Recency – time between visits;
- Frequency – “how often you shop”
- Value – how profitable is the customer to the store (if you only buy low margin goods, you aren’t necessarily very profitable), and how valuable is the store to the customer (do you buy your whole food shop there, or only a part of it?).
Working out what data to analyse also had to fit in with the business goals – the analytics needed to be actionable (are you listening, Library folks?!;-). For example, as well as marketing to individuals, Clubcard data was to be used to optimise store inventory (p124). “The dream was to ensure that the entire product range on sale at each store accurately represented, in selection and proportion, what the customers who shopped there wanted to buy.” So another question that needed to be asked was how should data be presented “so that it answered a real business problem? If the data was ‘interesting’, that didn’t cut it. But adding more sales by doing something new – that did.” (p102). Here, the technique of putting data into “bins” meant that it could be aggregated and analysed more efficiently in bulk and without loss of insight.
Returning to the customer focus, Tesco complemented the RFV analysis with the idea of “Loyalty Cube” within which each customer could be placed (pp126-9).
- Contribution: that is, contribution to the bottom line, the current profitability of the customer;
- Commitment: future value – “how likely that customer is to remain a customer”, plus “headroom”, the “potential for the customer to be more valuable in the future”. If you buy all your groceries in Tesco, but not your health and beauty products, there’s headroom there;
- Championing: brand ambassadors; you may be low contribution, low commitment, but if you refer high value friends and family to Tesco, Tesco will like you:-)
By placing individuals in separate areas of this chart, you can tune your marketing to them, either by marketing items that fall squrely within that area, or if you’re feeling particularly aggressive, by trying to move them from through the differnt areas. As ever, it’s contextual relevancy that’s the key.
But what sort of data is required to locate a customer within the loyalty cube? “The conclusion was that the difference between customers existed in each shopper’s trolley: the choices, the brqnds, the preferences, the priorities and the trade-offs in managing a grocery budget.” (p129).
The shopping basket could tel a lot about two dimensions of the loyalty cube. Firstly, it could quantify contribution, simply by looking at the profit margins on the goods each customer chose. Second, by assessing the calories in a shopping basket, it could measure the headroom dimension. Just how much of a customer’s food needs does Tesco provide?
(Do you ever feel like you’re being watched…?;-)
“Products describe People” (p131): one way of categorising shoppers is to cluster them according to the things they buy, and identify relationships between the products that people buy (people who buy this, also tend to buy that). But the same product may have a different value to different people. (Thinking about this in terms of the OU Course Profiles app, I guess it’s like clustering people based on the similar courses they have chosen. And even there, different values apply. For example, I might dip into the OU web services course (T320) out of general interest, you might take it because it’s a key part of your professional development, and required for your next promotion).
Clustering based on every product line (or SKU – stock keeping unit) is too highly dimensional to be interesting, so enter “The Bucket” (p132): “any significant combination of products that appeared from the make up of a customer’s regular shopping baskets. Each Bucket was defined initially by a ‘marker’, a high volume product that had a particular attribute. It might typify indulgence, or thrift, or indicate the tendency to buy in bulk. … [B]y picking clusters of products that might be bought for a shared reason, or from a shared taste” the large number of Buckets required for the marker approach could be reduced to just 80 Buckets using the clustered products approach. “Every time a key item [an item in one of the clusters that identifes a Bucket] was scanned [at the till],it would link that Clubcard member with an appropriate Bucket. The combination of which shoppers bought from which Buckets, and how many items in those Buckets they bought, gave the first insight into their shopping preferences” (p133).
By applying cluster analysis to the Buckets (i.e. trying to see which Buckets go together) the next step was to identify user lifestyles (p134-5). 27 of them… Things like “Loyal Low Spenders”, “Can’t Stay Aways”, “Weekly Shoppers”, “Snacking and Lunch Box” and “High Spending Superstore Families”.
Identifying people from the products they buy and clustering on that basis is one way of working. But how about defining products in terms of attributes, and then profiling people based on those attributes?
Take each product, and attach to it a series of appropriate attributes, describing what that product implicitly represented to Tesco customers. Then buy scoring those attributes for each customer based on their shopping behaviour, and building those scores into an aggregate measurement per individual, a series of clusters should appear that would create entirely new segments. (p139)
(As a sort of example of this, brand tags has a service that lets you see what sorts of things people associate with corporate brands. I imagine a similar sort of thing applies to Kellogs cornflakes and Wispa chocolate bars ;-)
In the end, 20 attributes were chosen for each product (p142). Clustering people based on the attributes of the products they buy produces segments defined by their Shopping Habits. For these segments to be at their most useful, each customer should slot neatly into a single segment, each segment needs to be large enough to be viable for it to be acted on, as well as being distinctive and meaningful. Single person segments are too small to be exploited cost effectively (pp148-9).
Here a few more insights that I vaguely seem to remember from the book, that you may or may not think are creepy and/or want to drop into conversation down the pub:-)
- calorie count – on the food side, calorie sellers are the competition. We all need so many calories a day to live. If you do a calorie count on the goods in someone’s shopping basket, and you have an idea of the size of the household, you can find out whether someone is shopping elsewhere (you’re not buying enough calories to keep everyone fed) and maybe guess when a copmetitor has stolen some of your business or when someone has left home. (If lots of shoppers from a store stop buying pizza, maybe a new pizza delivery service has started up. If a particular family’s basket takes a 15% drop in calories, maybe someone has left home)?
- life stage analysis – if you know the age, you can have a crack at the life stage. Pensioners probably don’t want to buy kids’ breakfast cereal, or nappies. This is about as crude as useful segmentation gets – but it’s easy to do…
- Beer and nappies go together – young bloke has a baby, has to go shopping for the first time in his life, gets the nappies, sees the beers, knows he won’t be going anywhere for the next few months, and gets the tinnies in… (I think that was from this book!;-)
Anyway, time to go and read the Tesco Clubcard Charter I think?;-)
PS here’s an interesting, related, personal tale from a couple of years ago: Tesco stocks up on inside knowledge of shoppers’ lives (Guardian Business blog, Sept. 2005) [thanks, Tim W.]
PPS Here are a few more news stories about the Tesco Clubcard: Tesco’s success puts Clubcard firm on the map (The Sunday Times, Dec. 2004), Eyes in the till (FT, Nov 2006), and How Tesco is changing Britain (Economist, Aug. 2005) and Getting an edge (Irish Times, Oct 2007) which both require a login, so f**k off…).
PPPS see also More remarks on the Tesco data play/, although having received at takedown notice at the time from Dunnhumby, the post is less informative than in was when originally posted…
10 thoughts on “The Tesco Data Business (Notes on “Scoring Points”)”
You may find ‘Programming Collective Intelligence: Building Smart Web 2.0 Applications’ a good read.
The ‘beer and nappies’ story is a bit dubious – see http://web.onetel.net.uk/~hibou/Beer%20and%20Nappies.html
@owen re: beer and nappies – dubious – yes (and thanks for digging around it), but it *is* mentioned in the book (albeit as an “apocryphal story”, I thin?;-), and does get the point across about how correlated data can turn up insights and potentially useful segments e.g. “Young Family with new born child”.
Just like the best quotes being misquotable, a good urban legend can be used as a story to illustrate a point!
(And I did qualify it by deliberately putting it in the misc/not quite sure section at the end of the post;-)
Customer loyalty cards work really well to sustain continuous customer flow.
Loosely related, here’s a case study of the whole Tesco business proposition from Coriolis research: Tesco: A Case Study in Supermarket Excellence (2004) [ http:// http://www.coriolisresearch.com/pdfs/coriolis_tesco_study_in_excellence.pdf ]
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