On The Cheap
Phil Kelly had a problem. Projections showed he'd need four of the men's specialty stores he wanted to open -- each doing $1 million in sales -- before he could break even. And for the life of him, he wasn't sure how he was going to attract enough customers. When he'd been running Marshall Field & Co.'s Chicago division, generating traffic wasn't any trouble: he'd buy full-page ads, run storewide sales, and create stunning window displays that filled an entire city block. But Kelly wasn't at Marshall Field anymore. He was across the street, setting up shop in 6,800 square feet of nondescript second-floor space, and attracting customers was definitely not going to be easy.
To decide how to do it, he needed to figure out -- accurately -- just what customers wanted. "You can't leave things to chance," Kelly says today. What he needed was market research, but he didn't have hundreds of thousands of dollars to spend on focus groups and phone surveys. He was back to square one.
Of course, that Kelly thought about research at all makes him unusual among his company-founding peers, many of whom shy away from it. Often cited are fears about high costs, lost management time, and findings that turn out to be nothing more than a jumble of meaningless numbers -- all reasonable concerns. As Joseph Smith, president of the New York City consumer research and consulting firm Oxtoby-Smith Inc., points out, "Smaller companies really are in a catch-22 situation. They can least afford to pay for information, yet often we have to charge them more, because compared with members of the Fortune 500 it is harder to find their potential customers. And the truth is, they need the research more."
He's right. If Chrysler errs in the introduction of a new car this spring, the mistake becomes a footnote to next quarter's earnings. If you mess up, it could cost you the company.
So what to do? You need information, but an hour of Smith's time can cost as much as $385 -- and hell, not even your lawyer is charging that. Does this mean you are best off relying on your "golden gut"? Phil Kelly didn't think so. He didn't believe the marketplace would permit it.
While pondering his problem, Kelly remembered a memo that most people at Marshall Field had long since forgotten -- a small scrap of the company's voluminous market research. It said that 75% of the department store's sales came from just 28% of its customers. And suddenly Kelly understood. The trick, he realized, wasn't to attract a lot of customers -- the trick was to get loyal ones. And how would he do that? Well, thought Kelly, if he could borrow Marshall Field's research to help devise what would become his principal marketing strategy, why couldn't he borrow someone else's already well-researched techniques for creating customer loyalty? Which is exactly what he did. Mallards, as Kelly calls his stores, has a frequent-buyer program. It works like this:
If during the year you spend $500 at Mallards, which sells high-quality, private-label clothing, you get a $35 bonus award. You can apply that 7% rebate toward your next purchase, or keep spending. The more you buy, the greater the bonus. It tops out at 16%, or $400 -- enough for a suit, several shirts, and ties at the Mallards stores in Chicago and Ann Arbor, Mich. -- for customers who spend more than $2,500.
"It's pretty obvious that we copied the frequent-flyer programs," says Kelly, 51.
It's also pretty obvious that at least part of the way Kelly has made Mallards work is to use, whenever possible, data and techniques developed and paid for by others. Market research on the cheap.
Kelly began his information hunt by reviewing all the research he had absorbed over his nearly 30 years in retailing, including "the decline of discounting, the growth of specialty stores, the rise of Nordstrom [a Seattle-based specialty chain that stresses service above all else], and the steady drop in department-store market share." Everything he could find went under the microscope as he began inventing Mallards.
Consider, for instance, the question of what the stores should carry. Traditionally, men's specialty shops offer expensive suits, defined by the industry as costing $350 or more. A very nice niche, it would seem -- the higher the price tag, the more money you make per suit. But, Kelly wondered, was the market big enough?
Kelly could have gone out and researched the question himself, but why reinvent the wheel? Clothing manufacturers probably knew the answer already. Would they be willing to help by sharing their research? Happily, it turns out. Kelly just had to ask. After all, manufacturers make money only if their retailers do.
The data they showed Kelly surprised him. Suits with high price tags account for only 15% of the market. Far more buyers -- 21% -- want suits costing $200 to $299. And there is far less competition in that price range, too.
Those were the customers, Kelly decided, that Mallards should chase. "We're after the professional without a lot of discretionary income," says Mallards co-owner Joe Cecil, also a Marshall Field grad. "That could be the accountant just starting out, or the 35-year-old lawyer who may be making $75,000 a year, but has two kids, two car payments, and a large mortgage."
The decision to target that market -- arrived at with the help of someone else's research -- dictated a large part of Mallards's merchandising strategy. If you sell $250 suits, you can't offer $100 shirts to go with them. The average price of a Mallards shirt is $30. Ties cost about $17.
It was only after his basic strategy was in place, and he had used every free piece of market research he could get his hands on, that Kelly first paid for a piece of information. He wrote out a check for about $4,000 to have a researcher run three group discussions, with 10 to 12 people each. "Obviously, the findings would not be statistically sound," Kelly says, but they didn't need to be. Kelly wasn't using the focus groups to shape what Mallards should be. He had already made that decision. The focus groups were meant to see if his decisions were correct.
They were. "What surprised me was how right we seemed to be," Kelly says. The groups did, however, give Kelly something new to think about. "The research showed that to most men, the salesman is the store, and that men don't shop labels. I believed private labeling could be successful, but not to the extent they told me it would be."
As a result of those findings, Kelly fine-tuned his idea. Today, 95% of his stock carries the Mallards name -- "We would love to be 100%, and I'm sure someday we will" -- a tactic that helps keep prices under control. Also, Kelly has made every attempt to attract, and keep, good sales help. From what he had been able to learn about compensation at Nordstrom, he developed his own policy of paying a decent base wage ($17,000) as an advance against commissions. Salespeople are expected to sell $275,000 worth of merchandise a year. If they sell $274,999 or less, they keep the $17,000. For each dollar above $275,000, they get an additional 6% commission.
What that does, of course, is given the salesman a tangible incentive to develop loyal customers -- which, you'll recall, is Kelly's main aim. Customers who buy dress clothing from Mallards receive phone calls a couple of weeks after to make sure they are happy with their purchases, and they get to shop at the end-of-season sale a few days before it is advertised to the general public. Then there is their membership in the frequent-buyer program, which Kelly calls the Executive Club.
"The Executive Club just gives people another reason to shop here," Kelly says, adding that its creation was not exactly comparable to the discovery of penicillin. "Everybody can figure out which customers are generating most of your revenues. All you have to do is go through your sales receipts, and act on the information. But you have to act. Customers are such elusive animals. Once you have one, you have to do everything you can to stroke it, feed it, and keep it happy."
So, by borrowing heavily from research conducted by others, Kelly created a different kind of men's store -- one that relies heavily on consistently moderate prices, private-label merchandise, and top-quality service.
Taken individually, none of these steps is particularly innovative. But together they are responsible for the creation of a rapidly expanding chain -- Kelly's fifth store will open next month -- that will record $4.6 million in revenues three and a half years after it opened and, true to projections, is about to turn profitable.
All this on research that cost a grand total of $4,000.
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