Case study: Relay Foods

The story
Retail Relay (now Relay Foods) is a retailer specialising in locally sourced and organic food products based in Charlottesville, Virginia.

The company’s business model is for consumers to order products online and collect them from a Relay delivery truck at designated locations at designated times near big employers or in high-density population areas. Consumers pull up in their car, pop the boot and the groceries are loaded.

The challenge
In the summer of 2010, the company wanted to improve its marketing strategies. It was specifically interested in determining which approach was the most profitable, particularly when it comes to acquiring new customers.

In particular, it wanted to determine the most and least profitable of the many methods it had tried for acquiring new customers.

The company’s approaches included direct mail, home-delivered fliers hung on the door handles of potential customers, social media, interviews on local radio and event sponsorships such as information booths at community functions.

To assess the long-term value to the company of each function, Relay conducted a customer lifetime value analysis, a way to financially value a customer relationship.

Such processes have become a staple metric for companies that market directly to consumers, such as those who use the internet as their storefront.

It requires creating a metric to predict future patterns of product orders by individuals and the probability that a new customer will stick with you, how loyal they will be and how much they are likely to spend.

The results
The findings of the analysis surprised the company.

Home-delivered fliers attracted consumers but these customers would never spend enough to justify the cost of their acquisition.

By contrast, social media marketing projected profits many times greater than their cost.

The analysis also revealed other lessons that could be applied beyond marketing. For instance, it highlighted the fact that lowering the logistics costs associated with the average customer order by just five cents would increase the predicted value of that customer over his lifetime by 10 per cent.

By presenting hard data on their customer acquisition methods, the analysis also showed how to make currently unprofitable strategies profitable.

Direct mail, for example, was unprofitable but by making small gains in the efficiency of the logistics behind it, the company could turn it into a profitable tool.

The outcome
As Relay Foods expanded into new cities within the region, such as the much bigger city of Richmond, it discarded several customer acquisition strategies it had used in Charlottesville.

Even though such methods were generating new customers, a customer lifetime analysis revealed that they were, in fact, losing the company money.

Relay also redoubled efforts to improve operational efficiencies – including conveyor belts to assist product sorting and more fuel-efficient delivery vehicles.

Greater efficiency means new customers are now more profitable and the company has greater latitude to pursue growth strategies that will build competitive advantage in the long term.

The lessons
Customer lifetime analysis can enable companies to hone their marketing strategies and focus on the key customers and methods.

Also, Relay’s success in establishing a direct financial link between operations and marketing strategy shows why effective marketing strategies should be considered in connection with operational efficiency. Marketing strategies that are analysed without taking account of operations may be effective at producing customers that are profitable only in the short term.

In business schools, marketing is often taught in one course and operations in another. In the real world, they are inextricably linked.
- Financial Times, 13 July 2011