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Personalisation in action

by Mark Abraham, Mitch Colgan, Shane Fisher, Florian Kogler, Chris Lynes, and Rachael Stein

Personalisation has transformed retail more than any other industry sector. Retail has the highest average score of any sector on our BCG Personalisation Index™, but the individual scores of dozens of retailers around the world show significant disparities between leaders and laggards. The revenue growth of retail personalisation leaders is 10 percentage points higher than the growth of retail companies that lag in this area. Given the share gains and category growth these leaders are driving, we estimate that $570 billion in incremental growth will accrue to these companies before the decade’s end. This accounts for almost 30% of the total personalisation opportunity available across industries.

The size of that prize - combined with the competitive pressure from digitally native ecommerce players and from established retailers that are investing heavily in personalisation - makes it imperative for retailers to harness their first-party data from each touchpoint to make the next customer interaction faster, easier, and more convenient.

Four trends driving personalisation in retail

Whether consumers are shopping for groceries, dining out, picking up a prescription, or buying materials and equipment for a home improvement project, retailers can track their behaviours and preferences, both during the purchase and between purchases. Across categories, retailers large and small are using this data to pioneer personalisation use cases. Our research and work supporting hundreds of retailers globally has revealed four trends across these use cases that will further reward retailers that personalise their customers’ experiences.

The role of retail media in personalisation

Building on these trends, leading retailers are rapidly building a digital flywheel that spans personalisation, loyalty, and now also includes an advertising business fueled by first-party data.

Retail media is changing the traditional economic model of retail. In aggregate, the retail media advertising business is growing by 25% per year, and we estimate that it will exceed $100 billion worldwide by 2026. Onsite retail media - which is targeted ads on a retailer’s website and other digital channels - can generate gross margins in excess of 85%. Retailers are using this highly profitable incremental revenue stream to fund the significant tech, data, and people investments required to drive the digital flywheel. Some retailers are now making as much money or more from data-driven advertising as they do from the products they sell.

Amazon Advertising has led the way in retail media, while large retailers such as Walmart, Target, Kroger, and Instacart have built billion-dollar businesses. Category specialists such as Home Depot, Macy’s, Ulta Beauty, and Walgreens have also established sizeable positions. Most retailers with more than $5 billion in annual revenue have already built retail media businesses with revenues of $100 million to $200 million and have plans to double or triple those businesses over the next three years.

Defining the personalisation agenda in retail

Guided by the trends driving personalisation, we have identified specific investment areas than can generate over $100 million of topline impact for large retailers:

Personalised offers at scale. Retailers should set explicit targets for how much of their and their vendors’ customer investments should go to personalised offers, because the returns are as much as three times higher than for mass promotions. Some retailers are also using personalised offers based on loyalty points to boost returns. Investments in automation and off-the-shelf vendors such as Eagle Eye and OfferFit can help scale the execution of personalised offers. Sweetgreen, the US salad chain, uses off-the-shelf technologies to personalise offers and recommendations in its app and also engages customers with fun challenges that entice them to explore more of the menu and discover new items.
Precision-targeted ads. To grow their retail media networks, retailers can expand their sales force, add offsite and onsite ad products, and invest in advanced measurement and increasingly sophisticated decision engines. Some retailers are also using the same data to increase the ROI on their own digital advertising spending by a factor of two or three and using non-endemic advertisers as an additional growth driver.
Product recommendations. Personalised product recommendations can drive 10–20 percentage points of cross-sell for multi-category retailers, because many customers have needs that span categories but may initially buy only in one category. Home Depot, for example, helps project-buyers find exactly what they need next by using its robust retail media network to power personalisation for high-value audiences across its owned channels. Tying recommendation models with real-time inventory data is also a massive opportunity for retailers, because abandon-cart rates can drop by half if the model recommends a suitable substitute product. This can increase the sell-through rates for perishable items by 10 percentage points or more.
Next-best experience engines. When one large pharmacy retailer established an “air traffic control” engine to coordinate its diverse mix of push communications, it achieved twice the engagement with only half the outreach. New customers were much less likely to disengage by uninstalling the app or unsubscribing from emails. By managing email, push notifications, SMS, and outbound calls with the engine, the retailer also saw an increase in high-value actions, such as prescription redemptions.

Achieving these kinds of returns from personalisation will take significant investment. We have found that large retailers leading in personalisation are making annual investments of $10 million to $40 million in customer data platforms, marketing automation tools, AI models and decision engines, and content creation and management. They are also hiring marketers, data scientists, engineers, and martech experts to operate these tools at scale, both in-house and by working with trusted vendors. Given these large investments, CEOs are appointing leaders who can orchestrate the cross-functional teams to scale personalisation efforts, while some CFOs are insisting on a gated approach, with early wins in some of the bigger use cases used to unlock further investments.

The personalisation playbook

We have developed a simple framework to use with your teams to assess how well you are delivering on each of the five promises of personalisation. This framework will guide the next phase of your personalisation journey, no matter where you are along the maturity curve.

1. Empower Me. Understand each customer’s needs and how best to meet them

Do we personalise experiences at each step of engagement throughout the customer journey?
Do we provide cross-channel personalisation capabilities?
Is every communication channel used for personalisation?

2. Know Me. Win customers’ trust and permission to use their data to improve their experience

Does customer data live in a single repository?
Is customer data integrated throughout our other marketing systems?
Do we have high-quality identity resolution in place?

3. Reach Me. Reach out to the right customer, in the right channel, at the right time

Do we conduct A/B testing on our personalisation efforts?
Have we deployed a next-best-action decisioning or product recommendation engine?
Do we automate customer segmentation?

4. Show Me. Tailor unique content to be relevant to each customer, enabled by generative AI

Do we offer tailored experiences on a 1-to-1 basis for every customer? 10-to-1? 100-to-1?
Are we able to launch personalised experiences or campaigns quickly from ideation to launch?
Do we use GenAI to automate the production of marketing collateral?

5. Delight Me. Design new ways of working and ensure continuous improvement, so a customer’s experience feels magical

Do organisational or technological impediments prevent us from measuring progress on personalisation?
Do we run weekly tests related to personalisation?
Do we implement improvements on a weekly or more frequent basis?

Most retailers have started their personalisation journey and made substantial investments. But for many, significant work lies ahead to go from good to great and realise the full potential. Answering the playbook questions will help you decide what your teams can do quickly to drive even more value from personalisation and capture your share of the $570 billion personalisation prize in retail.

Authors: Mark Abraham is Managing Director & Senior Partner, BCG Seattle. Mitch Colgan is Managing Director & Partner, BCG Chicago. Shane Fisher is Managing Director & Partner, BCG Seattle. Florian Kogler is Principal, BCG Boston. Chris Lynes isKnowledge Expert, Team Manager, BCG Boston. Rachael Stein is Principal, BCG Brooklyn.

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