Marketplace concept has been fairly common with online retailers such as Amazon.com and buy.com. However, it seems that multi-channel retailers are also joining the bandwagon. Sears and Walmart have both opened up their online platforms to allow third party sellers to list and sell their merchandise. This definitely opens up an alternative source of revenue for retailers and in these trying times, who doesn’t want to have additional revenue sources.

Actually, I am glad that multi channel retailers are opening up their “walled gardens” and thinking more and more from customer’s point of view. A marketplace concept helps fill the gaps in retailer’s product assortment so that the customers can find the products they are looking for. In addition, the retailer makes money from the marketplace sellers for every marketplace order that gets placed on their platform. This is a good first step. However, every time I hear that whistling sound from my sub, I get more and more convinced that the multi-channel retailers are leaving a significant opportunity on the table – an opportunity that can give them a sustainable advantage over pure-play online retailers.

If we take a step back and think about advantages that a multi-channel retailer can offer to their customers – we wouldn’t have to think hard before coming up with following:

1. Ease of buying online, and picking up at a physical store (Easy Product Discovery & research online, Save shipping costs, Pick up the product same day from a local store)
2. Ease of researching in a physical store and then later buying online. (Touch & Feel the product before buying, avoid a second trip to the store by buying online)
3. Ease of returns (Peace of mind – I can return my online purchase to my local store anytime).

So why are the multi-channel retailers not offering the above benefits when it comes to marketplace purchases? For example, I would love to shop a marketplace item on Bestbuy.com if I had the option to return that item to the Bestbuy store which is 4 miles from my house. This would certainly give Bestbuy an edge over other online players who are selling the same marketplace item, probably at the same price but require the customers to ship the item back to the marketplace supplier (potentially at additional cost to customer). I am sure there are few logistics issues to be overcome in handling third party returns at a brick and mortar store. However in today’s day and age, these issues can easily be solved by technology and some innovation in distribution network. The bigger problem is that a lot of times, companies give up because they focus on traditional retailing constraints vs. focusing on what is right for their customer. Several online retailers are now picking up the cost of return shipping because they recognize that ease of return is a very important factor in customer’s mind when it comes to online shopping (Did I mention my Sub?).

Breaking the multi-channel boundaries

Now let’s take this one step further. In today’s connected world, what is stopping a retailer such as Sears, Walmart or Bestbuy in offering this “Return” service to their online competitors? In other words, accepting returns for merchandise purchased at other online retailers such as Amazon. Sounds a little odd because why would a retailer offer such a service to their competitors? Well, the concept is no different than marketplace. It follows the same logic – retailers are opening their online platform to marketplace sellers so that they can list the merchandise for a fee. In a free market economy, companies shouldn’t think about internalizing their assets – they should focus on how to maximize the rents by opening up what they do best to other companies who want to use such services. Retailers like Sears, Bestbuy and Walmart have thousands of stores across the country – why shouldn’t they monetize this asset by offering merchandise return services to online retailers? If the multi-channel retailers begin to offer the return service to their competitors for a fee – it would create a win win situation for everyone. Let’s illustrate this with an example –

Let’s say Bestbuy partners with Amazon and allows all merchandise that is purchased at Amazon.com to be returned at any Bestbuy store. Let’s leave the logistics/issues aside (we will get to them in a minute) and think from a customer’s point of view first. I hope we can all agree that this would offer a huge benefit to the customers because now they don’t have to worry about the hassle of returning the merchandise back to Amazon in case of any issues. They can just drive to the nearest Bestbuy store, present their return authorization from Amazon, return the merchandise and get immediate refund. Here is a tactical blueprint of how some of these logistical issues can be overcome–

1. Customer decides to return an Amazon.com purchase to a Bestbuy store
2. Customer logs on to Amazon, prints the return authorization.
3. Amazon transfers the return authorization information along with the item details to Bestbuy Return Management systems.
4. Customer takes the return authorization to a Bestbuy store.
5. The store associate pulls the information from their POS system, inspects the merchandise and issues a Bestbuy Merchandise credit/ gift card to the customer.
6. Bestbuy leverages the already existing distribution channel to return the consignment of returned merchandise back to the online retailer, or to a liquidator depending upon the arrangement.

Win for Multi-Channel Retailers

So how does Bestbuy benefit from all of this? A few subtle things happen in above example –

1. Bestbuy issues a Bestbuy Merchandise Credit for the refund amount. This will ensure that the money will be spent at Bestbuy in future – easy way to “lock in” the future spend.
2. Retailer spend a lot of marketing dollars in today’s environment to drive traffic to their stores. In this arrangement, Bestbuy will get unsolicited traffic to their store – with no marketing spend. More importantly, every customer in this category just returned an item, and has been issued a Bestbuy gift card – perhaps there is a high probability that they will shop at Bestbuy before they leave?
3. Finally, Bestbuy could charge some sort of transaction fee to Amazon for providing this type of service. After all, Amazon’s operational costs associated with return shipping and handling merchandise returns would significantly drop because of this arrangement.

Win for Online Only Retailers

You are probably thinking why would an online retailer like Amazon want to do this? Especially when there is a potential of some leakage (customers returning an Amazon item might eventually shop at Bestbuy). Again, if we think from a customer’s perspective – the online retailers would now be able to offer thousands of return depots to their customers. This is a significant advantage compared to other online retailers who can’t offer in-store returns. As a customer, if everything else is equal, I would certainly want to shop at an online retailer which gives me much more flexibility and options in returning the merchandise. Ease of Returns has been identified as one of the key factors in online shopping based upon several research studies conducted for last several years. Therefore, the online retailer that offers this option would suddenly get access to a new demographic of customers who are currently not shopping with them due to concerns about hassles in product returns. At the end of the day, the online retailer’s objective should be to offer its customers an end to end experience that is built around what the customer expects, vs. an experience that is built around the internal constraints. Just because the online retailer doesn’t have any physical stores doesn’t mean that they can’t think and operate like a multi-channel retailer by partnering with others.

I realize I am potentially understating the complexity of the integration. However, in a Service oriented world, is there truly a big distinction between integrating systems within the enterprise vs. across the whole value chain? I really hope to see this concept in action sometime in near future – however in the meantime, I am not holding my breath and am off to a UPS store to figure out how to return this whistling device back to the cloud!

Fast forward 5 years – enter the connected world! I recently visited MySears.com and was amazed at the community involvement! Even though you see customers occasionally venting about product issues and their experiences, what is really impressive is that Sears has taken a bold step to let it all out in the open. They have provided an online platform where Customers are free to post their experiences. This is bold because it demonstrates leadership as well as compassion that Sears not only cares about listening to their customers, they are also not afraid of letting customers openly talk about their experiences online, however negative they might be. Interestingly, there is a group “Sears Cares” that addresses the customer service issues posted on the website. I think this strategy will definitely pay off in the long run, as long as the customer issues are addressed in a timely fashion and there is a feedback loop where customers are then able to share how their issues were resolved. In today’s world when there are so many forums and discussion boards where customers can vent about their experience – why not invite them to your own backyard and address the issues head on! MySears also has a section for customers to submit new ideas, and vote on other submitted ideas. Although this level of transparency will definitely improve the level of trust across Sears’ customers, the question is – is this enough?

Multi-channel retailers such as Sears or Walgreens have been focusing on traditional retail for more than 100 years. Although I think it is impressive that retailers such as Sears are able to leverage the online channel to win back one customer at a time, this approach is still reactive. What is more critical is to change the mindset of every single employee in how they think about leveraging the online channel. In today’s world, retailers need to stop thinking about a one-way means to push messages and product assortment to the customers. No company can outsmart or beat the collective intelligence of millions of users even if they spend millions of dollars every month. The online channel offers means to harness this collective intelligence that can help in making the right decisions for the target customers. Everyone talks about it, and yet, when it comes to making decisions, those decisions are generally supported by internal executives’ intuition vs. objective data that is collected from the customers. All the money that is spent by the retailers in marketing campaigns, assortment planning, merchandise planning, product design, store signage – how many of these decisions are based upon real customer feedback at the ground level?

Perhaps it is time to reinvest some of these dollars in platforms where customers can help make these decisions. Perhaps it is time to put the customers in charge – if they matter the most, shouldn’t they be the ones helping make strategic decisions? Why are retailers not investing in building an online portal where customers can collaborate on what assortment to carry in the store? Where customers can vote on what kind of promotions to run in the store? Where customers can rate the performance of the store associates that they interacted with? Where customers can not only help design the marketing campaigns, they can also become part of driving these marketing campaigns? Where customers can participate in designing cool apparel outfits or voting on the designs submitted by others?

I can go on and on but at a broader level, I think there is a significant need and opportunity for retailers to start outsourcing (or “crowdsourcing”) their internal decision-making to their own customers. The concept of Crowdsourcing has been around for few years now and yet only a few businesses have been able to take true advantage of the power of online communities. Multi-channel retailers stand to gain most from the power and wisdom of communities – learning from the customers using the online channels, and applying those ideas in the stores. Yes, it will require some sort of incentive to get the customers to participate in these kinds of communities. It is, however, amazing to see how eager customers are to participate and collaborate as long as their voice is heard and as long as they are able to achieve some sort of reputation/ expert status in the online community.

There are several retailers who make sure every new corporate employee in the company spends few days in a store when they start. I think the companies should also make sure that every corporate employee spends one week understanding the customer analytics that are being collected from the online channel. Every decision should be supported by some objective information that was collected by the online channel. I am not promoting the online channel just because I am biased. In this day and age, especially in a struggling economy, every single dollar that is leaving the company should be based upon a true customer insight – and the online channel offers a perfect means to not only capture those insights but also engage the customers in testing the ideas at a significantly cheaper cost.

An excellent example of leveraging the community in product design is Threadless.com – a web-based startup launched in 2000, which has become a poster child for how customers can actually create a company. Threadless sells t-shirts, but it does not design them. That’s up to its customers, who submit designs and stand to win small prizes if their submissions end up on a product. Then there is Polyvore, where people can combine fashion pieces into outfits they call “sets.” The interesting thing about fashion is that no item really stands alone — they are always combined into outfits. So instead of selling individual articles of clothing and accessories as most retailers do, combine them into outfits. And better yet, let customers do the creative work and then decide which outfits are most popular. The concept of crowdsourcing is now slowly being adopted by traditional companies. Whether it is My Starbucks Idea or Dell’s IdeaStorm or P&G’s Collect and Develop or Campbell’s Ideas for innovation, they all have one thing in common – they believe in the value of customer involvement in product design, and they have begun using the online channel to collect insights that would have been almost impossible to collect in the past.

What Sears has done is a good starting point – and is certainly more than what other “successful” retailers have done so far. Case in point – Target which still believes that the online channel is just another channel to drive sales therefore they don’t see any downside in outsourcing their entire online channel to Amazon. Wait a minute – did I just read that Target announced to end its pact with Amazon and build its own online presence? There are signs everywhere that multi-channel retailers are now seeing the online channel as something more strategic than just a revenue opportunity. However, I am rooting for the under-dogs like Sears who have recognized the strategic value of online channels and taken initial steps in directly engaging their customers. The true winners will however be the retailers who implement practical means to collect meaningful insights directly from their customers and then reform their internal processes to make and evaluate all tactical and strategic decisions based upon these insights.