Behavioural Science and Data are the New Building Blocks for Retail

At first glance, many classic bricks and mortar retailers do not look likely candidates for digital transformation. Let’s look at the rather extreme example of fuel retailers here: they sell a very physical product requiring a physical distribution structure. Consumer choice is often driven by convenience (location) and price, so it is hard to naturally dovetail in additional digitally oriented service features that are sufficiently attractive to change consumer behaviour.

However, at the same time, fuel retailing needs to change due to two key market pressures.   First, there is an increase in the purchase of alternatively fuelled vehicles which will inevitably lead to downward pressures on demand for fuel. Second, the trading conditions for fuel retailing is increasingly difficult due to a combination of fluctuating oil prices and regulatory demands. In these circumstances, any company would be foolish not to consider ways to mitigate risk and diversify their portfolio in some way.

And fuel retailers are perhaps in a good position to diversify given the nature of the infrastructure that they occupy. For example, Shell has 43,000 service stations, with half a million staff members serving 25m customers across 70 countries every day. As Istvan Kapitany, executive vice-president of retail at Royal Dutch Shell recently pointed out “This is one of the biggest retail networks in the world, with more stores than Starbucks or McDonald’s.”

So just how can fuel retailers monetise this enviable asset? Perhaps surprisingly the answer is likely to be through the combination of behavioural science and digital. The smart use of these approaches has potential to fundamentally change the way we think about fuel retailing and the way we engage with fuel brands. Here are the key ways it can work:

Dynamic Pricing:

Fuel prices do of course fluctuate (largely due to the price of crude oil), we see variation in pricing between retailers and as a function of location. But there is an opportunity for fuel retailers to think about ways in which pricing could be applied in a way to facilitate greater customer loyalty. If we think that fuel retailers are in the business of ‘journeys’, then they could offer the equivalent of rail travel-cards where consumers get access to ‘journeys’ (or an amount of petrol) in advance for a reduced fee (over the standard pay-as-you-go) ticketing. This is similar to energy companies that offer a wide variety of often innovative tariffs which include fixed prices for a period of time. The extent to which fuel retailers could offer this may be limited given pricing fluctuations but there could, at least, be a percentage discount on the price at the pump for those signing up. And this is where behavioural science comes in – to help design optimal tariffs that are sufficiently attractive, at a price level that still makes sense for the retailer.

Digital Payments:

Of course, the only way that dynamic pricing can work is if customers have the digital means of recording their fuel purchase and payments. This is already possible with, for example, Shell’s ‘Fill up and go’ service. With these sorts of platforms in place, retailers can use behavioural science to design new ways to attract customers.  Starbucks is a good case study here – their app constantly tempts customers with special offers (e.g. free drinks, discounts on ‘favourite items’). As fuel retailers have an increasingly sophisticated range of goods for sale – including, of course, many of the same that Starbucks offer, then surely there is great potential here. Again, this is about encouraging customers to visit more frequently, tempting them to try a wider range of services available at the site.

Personalisation:

This is where digital transformation can make a significant change. As customers use technology, then fuel retailers can generate individual customer profiles to deliver personalisation at scale. At one level this offers some fairly basic advantages such as being able to give personalised greeting in-store or delivering offers that are actually attractive and relevant because they are tailored to individual preferences. And different ‘packages’ can be designed for customers that blend fuel with other products and services on-site such as refreshments, attendant service and wi-fi access.

Look no further than airlines such as Ryan Air where the flight itself is only one part of a ‘journey’ package that is put together by the customer according to their preferences. In this way, the core product is simply one part of the package. The amount you pay the retailer is then less about the price at the pump and more about the tariff you choose along with the various ‘bolt-ons’ that reflect your personal preferences for the way you want to design your journeys. All engineered, of course, by the clever use of behavioural science to design the choices and pricing strategies to optimise the relationship between customer and retailer alike.

Nudging:

At the further end of the spectrum we are entering an age where savvy retailers can also use psychological profiles, so they know when and how to ‘nudge’ consumers. There is an increasing amount of information available about our inner lives from simple transactional data which reveals much about our personality, attitudes and cognitive styles. Understanding how these can be used in a way to optimise the relationship between retailers and customers will become a key focus for brands over the next couple of years. Executing this at scale with the use of AI such as chatbots is likely to offer brands real competitive advantage.

Most retailers are starting to understand the opportunity offered by integrating digital platforms and physical locations – there is a huge innovation in the digital space, which means that physical retailers must find a reason to continue with bricks and mortar, and if not, they should exit quickly.  A cautionary tale from fuel retailing is the rise of petrol delivery services such as Fild. Here customers log their details via an app and a tank is sent to refuel their vehicle. So unless fuel retailers understand what is compelling for consumers and execute intelligently, then these sorts of ‘uber’ style digital-only competitors will make life very difficult for retailers with expensive bricks and mortar investments.

This article first appeared in Brand Quarterly.

By Colin Strong