By: Milton Pedraza, CEO of Luxury Institute, LLC
June 2, 2015
Through the first five months of 2015, luxury firms have reported operating results and issued forecasts for the remainder of the year that look dismal for the most part. Global economic growth has been underwhelming but it is certainly not the only culprit for disappointing performance. The luxury industry is also rife with self-inflicted wounds. Many brands cling to outdated management practices that prevent transformation of sales channels from low-loyalty transactions into centers of humanistic, high-performance relationship building. My experience advising executives at hundreds of luxury brands over the decade is that poorly performing firms fail to follow a set of true best practices for building better client relationships consistently, correctly, or at all. Those who have made the successful transformation from transactions to relationships have fundamentally changed the way that they approach their business in several key areas. Based on our successful Luxcelerate High Performance Client Relationships System, here are seven rules for changing the way you manage and measure your business if you want to create more loyal, meaningful, and profitable customer relationships.
Rule #1: From Corporate Functions to Client Relationship Systems
Luxury brands are broken, literally. Despite all the omni-channel chatter you hear today, brands are broken up into departments and functions more fit for the factories and universities of the industrial era than fashion and luxury retailers of the digital age. Managers build fiefdoms at the expense of client loyalty and the company’s bottom line. All too often, executives from marketing, communications, retail operations and e-commerce fail to work together to deliver a coherent and optimized client experience. Instead they produce a dysfunctional set of activities. The solution is creating a mind-set of systems-thinking that recognizes how all parts and people in a company are organically interconnected and affect each other profoundly. To align competing interests, you can place all the silos that touch the client under one client relationship executive, and base compensation at all levels on achievement of relationship targets such as client data collection, conversion, recovery, retention, and referral rates. A system cannot be divided artificially into independent parts and be effective, any more than a human body can be split into its parts, and still function.
Rule #2: From Competitive Benchmarking to Competitive Breakthroughs
Benchmarking is the process of comparing business processes and performance metrics to those of the best practitioners. Benchmarking has a small role to play in luxury; however, complex situations that involve creativity and human behavior call more for differentiation and efficiency than trying to emulate an imperfect comparison. Who did Apple benchmark in inventing retail stores, or the Apple Genius concept, or the iPhone? Who did Net-a-Porter benchmark when they invented edited luxury online shopping? One reason that the luxury industry is stalling is a lack of breakthrough innovation. The result has been the rapid commoditization of the industry. If you want your luxury brand to be highly valuable and profitable you need to move beyond benchmarking. Luxury brands need to go from continuous improvement to discontinuous improvement, which demands breaking the rules through innovation. If you are playing the benchmarking game your brand is destined to become a race-to-the-bottom commodity.
Rule #3: From Top-Down Leadership to Front-Line Empowerment
Most luxury executives believe that their job is to create a vision, communicate it, and convince their followers to execute it. If you work at a luxury brand, you need no examples to prove this; just step outside of your cubicle. The successful 21st century luxury leader knows how to engage and empower people to apply their talents and passions towards a worthy goal and recognizes that strong human relationships harness collective wisdom and innate genius to adapt and shape the future. Designing a client culture requires that leaders relax into success, and trust people profusely to adapt continuously. It is an imperfect process, but it works. Three leaders today who exemplify the best of luxury are Angela Ahrendts at Burberry (now at Apple), Natalie Massenet at Net-a-Porter (now at Yoox), and Marco Bizzarri at Bottega Veneta (now at Gucci). We could all do well to emulate these leaders in their capacity to trust front-line colleagues to achieve outstanding results, and provide them with the resources to do it.
Rule #4: From Big Data to Actionable Wisdom
Omni-channel client relationships are the coolest thing around now and they are fed by Big Data. Despite Big Data, Luxury Marketing campaign response rates have hardly moved from microscopic levels over the past decade, and offline client conversion and retention rates are stalled in the low teens. The problem is that Big Data is rarely transformed into actionable wisdom. Data is not information, information is not knowledge, and knowledge is not understanding, nor is understanding wisdom. Wisdom remains the domain of humans. Injecting human wisdom, and empowering your store and call center associates to use their judgment, along with data, to create appropriate one-to-one client communications might not be as sexy as developing an algorithm, or pushing a mass campaign button, but it can be far more effective in building client relationships. By leveraging Big Data with wisdom, one sales or call center associate, and client, at a time, luxury can finally go from doing the wrong thing right, to finally doing the right thing right.
Rule #5: From Aggressive Selling to Genuine Human Relationships
With sincere love to Daniel Pink, author of “To Sell is Human,” whom I believe to be one of the most enlightened researchers on organizations, I completely disagree with the title and premise of his book. “Selling” even in its most well intentioned versions, is not human. As practiced today, selling reduces associates to being clerks ringing up transactions instead of brand ambassadors building long-term relationships. Selling is one key reason luxury brands, with their robotic “sales ceremony” concept, are so poor at client conversion and retention, never mind referrals. Thankfully, humans are wired to build relationships in order to survive and thrive. For the most part, we love the process. It does not require a game-face or pretension to execute. In Luxury Institute surveys over the past decade, consumers across all generations have repeatedly told us that they want three major over-arching qualities in a sales associate: expertise, trustworthiness and generosity. Without these, even a parent-child relationship falters. Let the mass brands do what they will, but luxury brands should immediately discard the aggressive selling playbook, and embrace the art and science of high-performance client relationship building, where value is created not from transactions, but from consistently and continuously outperforming and outbehaving the competition. Creating clearly measurable functional and emotional mutual value through a relationship is inherently imperfect, but alternative forms of selling are surely dead.
Rule #6: From Front-Line Associate Training to Front-Line Associate Mastery
Top-tier luxury brands have instituted elaborate training programs and skyrocketing costs to prove it, but rates of client conversion and retention remain stuck in neutral. Luxury brands need direly to redefine training into education, and elevate education into mastery of building high-performance client relationships. Training is something you do to people, and people reject being trained into success, which is why all the talking-head training is ineffective. When it fails, brands keep adding more old-school training, but this only compounds the problem. It is often said that in a college classroom, the only one learning is the teacher, so part of the secret lies in transforming everyone from a trainee into a learner, and a teacher. It is also true that online education, when used in a humanistic and empowering way, such as is done by the Khan Academy, combined with daily one-to-one, metrics-based coaching, peer-to-peer learning techniques, and inspirational reinforcement, can make learners, teachers and relationship masters out of all your front-line associates.
Rule #7: From Front-Line Managers to Front-Line Coaches
The store manager is the spine of the luxury brand. Since 75% of the people who work in a luxury brand are front-line associates, the front-line leaders who engage them daily are critical in ensuring that employees consistently apply the brand’s relationship values and standards to drive results. How much time do store managers spend on the floor? In the more enlightened luxury brands, about 50%, and in far too many cases, they’re on the floor less than 30% of the time. That means that store managers are store administrators and back-of-house experts. Many who do spend a great deal of time on the store floor have absolutely no clue how to coach high performance client relationships. All they know is bossing and selling. Coaching is an art and a science backed by research. Coaching relationship building is a craft that requires expertise. The solutions are to hire experts to run the store operations, perhaps regionally, and to redefine the store manager job into coaching and client relationship building. The store manager should spend 90% of their time observing and coaching associates and/or engaging with top clients to develop experiences where they can bring their friends and family. Innovative, empirically-based coaching programs need to be developed to educate our armies of store managers in the art and science of coaching for client relationship building. Until that happens, expect your costs to go up while results falter because more of the same harder won’t work this time around.
Capture Opportunities With A Client-Focused Culture
Despite sluggish economic growth, the ranks of the wealthy around the world continue to grow. Luxury brands are faced with a tremendous opportunity, as the world’s wealthy people have the capacity and the desire to spend lavishly where they choose. The only companies that stand to capitalize, however, are those that approach their business from the perspective of these customers and create systems that cultivate relationships instead of simple transactions. No less than long-term survival for luxury firms depends on the ability to effect key transformations in the seven areas addressed here.
About Milton Pedraza and Luxury Institute, LLC
Milton Pedraza is the CEO of the Luxury Institute. Over the past 12 years, Milton has established the Luxury Institute as the most trusted global luxury research provider, and the proven high performance luxury client relationships consulting firm. Known globally as the foremost resource for affluent and wealthy consumer insights and client experience best practices, the Luxury Institute has served over 1,000 global luxury goods and services brands across dozens of luxury goods and services categories.
Milton advises and coaches luxury CEOs and serves on the Boards of top-tier luxury and premium brands, and luxury startups. He is sought after worldwide for his practical, innovative and humanistic insights and recommendations on luxury and is the most quoted global luxury industry expert in leading media and publications.
Milton is also an authority on CRM Technology, Analytics and Big Data. Prior to founding the Luxury Institute, his successful career at Fortune 100 companies included executive roles at Altria, PepsiCo, Colgate, Citigroup and Wyndham Worldwide.
Milton was born in Colombia, raised in the United States, has lived in several countries, conducted business in over 100 countries, and speaks several languages.
For more information please contact:
CEO, Milton Pedraza
Luxury Institute, LLC
115 East 57th Street, 11th Floor
New York, NY 10022