How retailers study and test us to maximize profit

— -- Shoppers are like laboratory rats these days.

From the time shoppers walk into stores, their footsteps, eye movements, choices and reactions to discounts are often closely monitored. With this analysis, stores can determine with startling accuracy whether changes such as remodeled stores, specific deals and more salespeople will make people spend more.

Just as some lab rats get only a placebo, retailers typically test new strategies by giving shoppers in certain areas a promotion — or fixed-up store — while others are the control group. Growing pressure to improve profit margins means retailers' decisions must get results. People can't just buy something they wouldn't have otherwise, they need to spend more.

Author Charles Duhigg's revelation that Target had developed a model to predict whether female customers were pregnant ignited a firestorm after an excerpt from his book, The Power of Habit: Why We do What We Do in Life and Business, was published in TheNew York Times. According to Duhigg, Target sent baby-related promotions to a teenage girl before her father even knew she was pregnant.

While people may expect retailers to track their online shopping, "They don't expect that same science to be used to peer into their bedroom," says Duhigg, a New York Times business reporter. People wonder, "If they know what's going on in my bedroom, what else do they know about me?"

But retail consultant Kevin Sterneckert says that's "exactly what so many retailers are doing today" so they can market to people in the different "life stages."

Target said in a statement that it analyzes customers' preferences so it provides promotions that are relevant. And it says customers can opt out of the marketing programs.

Analysis of shoppers ranges from mundane methods, such as counting the number of teens who walk in after school, to the high-tech, such as digital signs with cameras that can detect where people's eyes move and direct promotions to that part of the screen. By calculating who is shopping when and which demographic groups are buying, stores can target them with the promotions that are more likely to resonate. They do this with their own analytics departments, bolstered with some of the consultants and technology suppliers that made up more than 3 acres of exhibit space at the National Retail Federation's annual conference in January.

Stores and their suppliers are constantly analyzing sales data, which is linked to shoppers through store loyalty cards. Much of the information retailers know about shoppers is based on information they provide when they sign up for loyalty cards or even e-mail lists. Stores don't want to celebrate your birthday — though they may send a gift: They want to know how old you are so they can better understand how to market to people your age.

Even when people don't buy, stores know who is browsing their aisles — and the routes they take around stores — by reviewing their security cameras. Then they can place products and promotions at strategic locations visible to the largest number of shoppers.

"When there was a single store in town in the 1920s, that shopkeeper knew everything about his customers," says Sterneckert, VP of retail research at business advisory firm Gartner Group. "Now, you have mega chains where it's impossible for the store manager or buyer to know individual preferences. But they can analyze transactions and determine patterns."

Retailers are also rapidly shifting to electronic signs, which they can update frequently from a central location. These can include cameras that detect who is looking where on the sign — or on a fast-food menu board — and tailor promotions to that person based on their gender and even age.

A digital sign in a department store's cosmetics department, for example, could determine that the person walking through is a man, put up an image of a car or something else likely to attract his attention and then slip in an ad for a men's cologne, says Rich Ventura, a sales director at NEC Display Solutions, which designs digital signs. Fast-food restaurants, he says, will promote food — especially the types they are trying to sell fastest — in the areas on the menu boards where the software shows people most often look.

All about increasing sales

"You get better economics if you're changing the behavior," says Anthony Bruce, whose company, Applied Predictive Technologies, does testing and analysis for many of the largest retailers and restaurateurs. When stores make a big capital investment or offer a deep discount, "it's a big loss" if sales don't increase, Bruce says.

With consumer credit card debt increasing once again and purported deals coming at shoppers from all angles, it pays to know what prompts us to make what's often an impulse purchase and whether it's a rational — or at least affordable — decision, consumer experts say. But how much is too much information for stores to know about us?

While a pregnancy-prediction model may sound extreme, retailers are constantly analyzing demographic and other information about their shoppers, particularly what they buy.

"I assume they are watching us, but I find it insulting to think they can specifically target promotions to me based on my age and sex," says Elizabeth Dore, 68, an education professor at Radford University in Radford, Va. "They know absolutely nothing about me, and my age does not have anything to do with what I might be shopping for."

David Govaker, 54, says constant monitoring may "sound creepy, but that's what we all do every day."

"Imagine you're at a cocktail party — you're gathering information from the people around you to get what you want or need," says Govaker, a former pharmaceutical company executive from Brooklyn.

Buy one, get six?

Retailers use a form of the randomized trials that have been used since at least the 1940s in medicine. Direct mail was one of the first areas where marketers could easily test the effectiveness of a promotion, by sending one version to some households and another — or no promotion at all — to similar households. Bruce says many of the credit card offers consumers get in the mail are different than those others are receiving. It's either tailored to what they know about the consumer or part of a test to see whether it's the kind of catchy pitch that will make it stand out in that pile of junk mail.

Testing means that if a deal, store redesign or other strategy doesn't pay off — or backfires — "it's not damaging the brand over the entire country," Bruce says.

It's so hard for stores and other marketers to sort out the noise — the other variables, like a pay raise or new grandchild, that make us shop or not — that it's hard for them to know what really works without testing it first using its control group of business-as-usual, says Bruce, whose clients include Walmart, Dick's Sporting Goods and Staples.

Retailers now test nearly every move before they make a big investment. What they have learned:

•When stores offer a good deal on one item, consumers often spend more on other full-priced products. Subway, for example, was convinced selling foot-long sandwiches for $5 would be a bad idea. Bruce recalls store executives saying, "Folks are going to come in, buy a foot-long and split it in half." But after his company helped test the concept, Bruce says Subway learned "it drove traffic in a way that completely made it pay off." People also bought more full-priced chips and drinks, increasing the per-visit payoff.

•If they offer freebies or half-price deals, retailers try combinations shoppers wouldn't likely buy on their own. "Buy one, get one free" only pays off if most shoppers wouldn't have gotten two. That's why deals, such as Jos. A. Bank's seemingly confounding "buy one, get six" sale last month can make sense, Bruce says. Those who bought a suit got two suits, two shirts and two silk ties free — a combination few would have ever planned, and that likely drove many unplanned new-suit purchases.

•Discount fashion stores that do major renovations have found some customers believe prices were raised even when they weren't. So they buy less. It's one reason off-price retailers often don't invest much in their store environments, Bruce says.

Bruce's company helped the discount store Family Dollar test whether it should expand its refrigerator and freezer section. The investment wouldn't pay off unless it attracted more shoppers and they bought more than just the food in the new refrigerators and freezers. It worked.

"Food is a huge impulse item," says Dorlisa Flur, the 7,000-store chain's chief merchandising officer.

Looks matter

Stores are regularly testing whether remodeled stores prompt people to spend enough more than they would have otherwise to make the expense worth it.

David Forbes, a psychologist who is a consultant to retailers including Nordstrom and Gap, recently helped a high-end retailer that was opening outlets come up with an "industrial chic" décor. After all, Forbes says a store's ambience can lure or repel consumers based on their mindsets and what they look for emotionally in a shopping trip.

"Fancy upscale stores can provide many shoppers with reinforcement of the idea that they are … rewarding themselves by shopping at that store," says Forbes, CEO of Forbes Consulting Group in Lexington, Mass. While discount stores can't be too fancy, they "can potentially have an off-putting visual effect on their customers if too little attention is paid to aesthetics, suggesting the company is indifferent to the consumers' experience in the store."

Family Dollar's Flur says her company measures the effect of remodeling "with footsteps and baskets," that is, the number of customers and how much they spend. Customer surveys can also tell them: "Did the customer even notice, and was it a positive or a negative impression?" she says.

Retailers say all this shopper analysis helps consumers. Brian Gansmann, 43, agrees.

"Until a retailer can truly read my mind, I have no problem with them trying to figure out what makes me tick," says Gansmann, who owns Gate 2 Plate, a food-development and marketing firm in Denver. "And if what makes me tick enhances my overall experience, I will spend more time and dollars. Win-win situation."