The biggest word in retail right now is omnichannel, the seamless integration of online and off-line shopping. Omnichannel networks create a frictionless world for demanding consumers. But for businesses, building that network while also developing new products can be daunting. Santiago Gallino, a professor of operations, information, and decisions at Wharton, and Robert Rooderkerk, an operations management professor at the Rotterdam School of Management at Erasmus University, have found some best practices based on the success of companies that are getting it right. Their study, “New Product Development in an Omnichannel World,” was published in California Management Review.
Knowledge@Wharton: Your study is prescriptive for retailers: You’re not just telling them they need to be omnichannel in new product development; you’re handing them a research-based road map on how to get there. Among the seven recommendations in your paper, you advise companies to get more input from customers earlier in the product development process and even to make them co-creators of products. How is that different from the past?
Santiago Gallino: Many of these things are not completely new. The change is the extent to which this becomes available to companies. Before, it was harder for them to get to those co-creation opportunities. In the article, we explore Lego Ideas and Nike By You. These are companies that have been keeping an eye on customers and the things they like for many years. But now, they have this opportunity that the digital platform has given them to invite customers very early on in the process, or even watch how customers can create new products or combine their existing products in different ways. This allows companies and brands to learn from actual customers. But they also learn from people who are not going to buy, understand why they’re not buying now, and learn what they can do to make them become customers in the future.
Another key change is the volume and the speed of data that the companies can access from these customers, and how companies inform their creativity and new product development process based on this new volume of data. I think these two aspects — the idea of learning not only from customers but from the non-customers, and the volume and speed at which the companies receive the data — are really critical in this new process.
K@W: Does this co-creation go beyond the traditional focus group that’s put together when companies try to bring something to market?
Robert Rooderkerk: Focus groups are static and expensive to run, and you often have to run multiple ones. But customers are often intrinsically motivated to contribute to a company or its innovation process. So it’s about activating those customers.
Santiago already explained that getting access to customers has become easier using all sorts of digital platforms. But you’re also seeing companies connecting to customers in new ways, often forming online communities. A great example is Lego, the toy manufacturer that has been extremely successful in creating an online community and has leveraged that community for new product development ideas. They often hold contests, called Lego Ideas, in which people can contribute an idea for a new toy set. Not only do people contribute the ideas; the community votes on these ideas. You instantaneously generate ideas and vet them with your potential customers — and these customers are often extremely creative. You’re using a sort of outside-in innovation. You’re almost outsourcing your innovation process. It’s very simple. You have to appeal to their intrinsic motivation. You can often also apply extrinsic motivation, as in the case of Lego. They provide the winning entry with one percent of the revenue that’s made from the products. Winners also get credited on the packaging.
K@W: In your paper, you say retailers need to widen their scope and get more input from their trade partners. What kind of input?
Rooderkerk: Manufacturers typically have organized a new product development process by doing a lot of marketing research, like focus groups or a taste test. But it’s still kind of a push-demand to innovation, where the manufacturer starts the innovation process, solicits feedback, and screens interesting ideas based on that. Trade partners often have much better access to the consumer. Selling to a retailer means you broaden your distribution, but it also means you give up some of the direct access to your customers. Now, a retailer can sit on the data and not share it, or actually use it for private-label development. Let’s take Amazon as an example. Amazon has leveraged data obtained by selling big brands on its platform by actually developing its own brands. Amazon currently has more than 100 brands, often under the radar.
But a retailer could also take the point of view of sharing data, or insights from that data, with manufacturers. A good example is Alibaba’s Tmall platform, which has started a marketing research branch called the Tmall Innovation Center that shares data with leading manufacturers to jumpstart their innovation process. Alibaba was mining its data and saw that, for example, consumers who were looking for chocolate were often also buying spicy foods. They made a very simple suggestion to Snickers to export its avenue of combining chocolate with spice, and they came up with a spicy Snickers. That turned out to be one of the most successful consumer-packaged-goods introductions in China. Leveraging data that a retailer’s sitting on and sharing it with the manufacturer could lead to much better innovations. Then the retailer has the first rights to sell that product.
The second component is operational considerations. A retailer knows very well the difficulties involved in selling and shipping product. For instance, in Holland, a retailer knows very well what the size of a mailbox is. An international manufacturer doesn’t have that local market knowledge. By slightly adjusting the packaging, a delivery could be put through a door, which would lower transportation costs or delivery costs. Customer preferences and operational considerations are typically the data that retailers have and could share with manufacturers.
K@W: Are there downsides to manufacturers and retailers working together?
Gallino: The mind-set in the past will suggest that these tend to be confrontational or competing relationships. What we are seeing today is that when these are seen as collaboration and opportunities for partnership is when the customer gets the best of the two. This is even more evident when you see retailers that are platforms. The customer of the platform is both the end customer who’s going to buy the product and those vendors that need to be attracted to place the products in the platform. This is a game changer for the role of the traditional retailer, now transforming to a platform that sees customers on both sides.
We used to think about the relationship between manufacturer and retailer as competitive. But going forward, we should expect to see more collaboration and more data-sharing, and an opportunity for both of these to grow.
K@W: Your paper also recommends that companies think outside of marketing and sales in new product development, to involve departments that don’t always get considered.
Gallino: One clear example of this is when we think about the packaging and the delivery process of the product. In the past, when we ignore the omnichannel component, all of this is going to happen from a distribution warehouse to a retail store to the customer home. But nowadays, this path isn’t as clean as it used to be. And in many cases, companies are delivering products directly to the customers.
This requires involving in the development process areas that traditionally might not have a lot to say. But to date, they have had a lot to say about the delivery of the product. What can be more efficient? What can be more convenient for the customer? What can be more cost-effective and safer in terms of making sure the product arrives in good shape and in the condition that the customer expects? And there is the experience once the customer opens the product at home, which is a very different experience compared to the store. In the store, you get to meet the sales representative, you could talk with them, they package everything for you, and you take it home. There is a lot of emotional engagement and learning of the product in that process.
Nowadays, we receive a box at home, we open the box, and that’s when the magic happens. Companies are being more thoughtful and creative about that change in the omnichannel layout and are thinking about how they can create the wow factor at the moment that someone opens the box.
Published as “The Omnichannel Dilemma” in the Spring/Summer 2021 issue of Wharton Magazine.
