The Customer
Isn't Always Right

Best Buy Wants to Keep the Wrong Kind of Shopper Out of Its Stores

By Gary McWIlliams
Staff Reporter of The Wall Street Journal

Each day, about 1.5 million customers come into a Best Buy store. Best Buy wishes some of them wouldn't.

Best Buy CEO Brad Anderson says he wants to separate "angel" customers from the "devils" The angels, according to Best Buy, are customers who boost profits at the consumer-electronics giant by snapping up HDTVs, portable electronics, and newly released DVDs without waiting for markdowns or rebates.

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The Customer Isn't Always Right Each day, about 1.5 million customers come into a Best Buy store. Best Buy wishes some of them wouldn't. CEO Brad Anderson says he wants to separate "angel" customers from the "devils" The angels are customers who boost profits by snapping up HDTVs, portable electronics and newly released DVDs without waiting for markdowns or rebates. The devils are its worst customers. They buy products, apply for rebates, return the purchases, then buy them back at returned-goods discounts.

The devils are its worst customers. They buy products, apply for rebates, return the purchases, then buy them back at returned-goods discounts. They load up on "loss leaders," severely discounted merchandise designed to boost store traffic, then flip the goods at a profit on eBay. They slap down rock-bottom price quotes from Web sites and demand that Best Buy make good on its lowest-price pledge.

Best Buy estimates that as many as a fifth of 500 million customer visits each year are undesirable. And the CEO wants to be rid of them. He says the strategy is based on a theory that advocates rating customers according to profitability, then dumping the up to 20% who are unprofitable. The new approach upends standard practice among mass merchants, who typically seek to maximize customer traffic.

Hurricane on the Horizon

Best Buy seems an unlikely candidate for such a radical makeover. With $24.5 billion in sales last year, the company is the nation's top seller of consumer electronics. Its big, airy stores and wide inventory have helped it increase market share, while rivals such as Circuit City Stores and Sears, Roebuck have struggled.

But Mr. Anderson spies a hurricane on the horizon. Wal-Mart Stores, the world's largest retailer, and Dell, the largest PC maker, have moved rapidly into high-definition TVs and portable electronics, two of Best Buy's most profitable areas.

Mr. Anderson worries that his two rivals "are larger than us, have a lower [overhead], and are more profitable." In five years, he fears, Best Buy could wind up trapped in what consultants call the "unprofitable middle," unable to match Wal-Mart's sheer buying power, while low-cost online sellers pick off its most affluent customers.

Last year, Best Buy rolled out its new angel-devil strategy in about 100 of its 670 stores. It is examining sales records and demographic data and sleuthing through computer databases to identify good and bad customers. To lure the high-spenders, it is stocking more merchandise and providing more appealing service. To deter the undesirables, it is cutting back on promotions and sales tactics that tend to draw them, and trimming them from marketing mailing lists.

As he prepares to roll out the strategy chainwide, Mr. Anderson faces significant risks. Because different pilot stores target different types of customers, they threaten to scramble the chain's economies of scale. The trickiest challenge may be to deter bad customers without turning off good ones. Says Mr. Anderson: "The most dangerous image I can think of is a retailer that wants to fire customers."

A Portfolio of Customers

Mr. Anderson's makeover plan began taking shape two years ago when the company hired a consultant named Larry Selden, a business professor at Columbia University. Mr. Selden's research shows a correlation between a company's stock-market value and its ability to cater to profitable customers better than its rivals do. At many companies, Mr. Selden says, losses produced by devil customers wipe out profits generated by angels.

Mr. Anderson was intrigued by Mr. Selden's insistence that a company should view itself as a portfolio of customers, not product lines. Mr. Anderson then organized a task force to analyze the purchasing histories of several groups of customers, with an eye toward identifying bad customers. The group discovered that 20% of customers accounted for the bulk of profits.

Best Buy concluded that its most desirable customers fell into five distinct groups: upper-income men, suburban mothers, small-business owners, young family men, and technology enthusiasts. Mr. Anderson decided that each store should analyze the demographics of its local market, then focus on two of these groups and stock merchandise accordingly.

Best Buy began working on ways to deter the customers who drove profits down. It began enforcing a restocking fee of 15% of the purchase price on returned merchandise. And to discourage customers who return items with the intention of repurchasing them at an "open-box" discount, it is experimenting with reselling returned items online.

Meet Barry and Jill

Shunning customers is a delicate task. Mr. Anderson says Best Buy will first try to turn its bad customers into profitable ones by selling them warranties or more profitable services.

Store clerks receive hours of training in identifying desirable customers according to their shopping preferences and behavior. High-income men, referred to internally as "Barrys," tend to be enthusiasts of action movies and cameras. Suburban moms, called "Jills," are usually willing to talk about helping their families. Staffers use quick interviews to pigeonhole shoppers. A customer who says his family has a regular "movie night," for example, is pegged a prime candidate for home-theater equipment.

Best Buy's decade-old Westminster, Calif., store is one of the 100 now using the new approach. It targets upper-income men with an array of pricey home-theater systems, and small-business owners with network servers, which connect office PCs, and technical help unavailable to other customers. On Tuesdays, when new movie releases hit the shelves, sales clerks prowl the DVD aisles looking for promising candidates. The goal is to steer them into a back room that showcases $12,000 high-definition home-theater systems.

Mr. Anderson says early results indicate that the pilot stores "are clobbering" the conventional stores, with sales gains running nearly double those of the traditional stores.