Retail Media’s Three Body Problem

Every retailer that has dabbled in this space has their own internal flywheel that articulates their retail media value proposition against the broader business strategy (i.e. how does retail media serve to feed the goals of the retailer). 

Inevitably we all try to make these flywheels seamlessly fit for our three most important constituents. And it goes something like this:

For the Retailer:

• improve our profitability

• drive more traffic

• capture our fair share

• create a competitive moat

• increase media weight

For the Supplier (Brand): 

• drive incremental growth

• conquest competitors

• secure additional space

• understand how people are shopping my brand

• be more in control of how my dollars are spent at retail

For the Customer (Shoppers): 

• provide them with more relevant advertising

In this week's Retail Media Leapfrog Series newsletter - articles that serve to help merchants (traders), operators, and retail marketers leapfrog incumbents leveraging learnings from real retail media architects - we talk about the three body problem in retail media.

Clearly we’ve spent a heck of a lot of time thinking about the business problems we’re addressing from the lens of a retailer and its suppliers, but not as much on the problems we’re solving for our customers. And if we want to keep this retail media thing growing, we’re going to need to think about the customer a lot more.

From a retailer perspective the benefits are clear, and where we spend our time is on the decision to build a retail media business, or the complexities of operating one.

Deloitte Digital has some great data on this from a 2023 survey of 450 retail executives in the U.S.

From data security to staffing to measurement, there is a lot to think about because this is a relatively new business model for retailers. You’ll notice that the concerns highlighted make no reference to the two other bodies - the supplier and the customers. 

From a brand perspective, the focus is along the lines of, ‘what is holding me back from investing at greater scale?’ 

A 2023 DoubleVerify study suggests that the core challenges brands are facing are related to cost, ad space, standardization and measurement. These responses are pretty consistent across most surveys.

Skai's 2023 study found that additional challenges included supply chain and poor ROI. 

Notice again that customer (shopper) considerations are not top-of-mind for brands either.

“What is retail media? Does anybody else feel like they’re getting retargeted a lot more lately?” ~ The Customer

One might argue that the customer benefit is not top-of-mind because it’s obvious, ‘of course it’s good for them, they get more relevant ads’! 

But as a customer, when you get retargeted with the things you’ve already bought, or a system determines that you are more likely to fit into the cohort of something else they show you, does it make your shopping experience more joyful?

You could also argue that because it drives sales, it’s clearly relevant, so they must like it? In this we’re taking a big leap - assuming that just because they bought something off an ad, that it was of value to their experience. 

So what could it be? What is retail media’s real value for the customer? Let’s look at what that customer ultimately wants.

As it relates to ‘buying something new’, a McKinsey & Company study found that product availability and value were by far the most important factors. 

Many other surveys suggest that more information about the product is key to making a purchase decision - especially online.

What customers want then is reasonably consistent across the board:

1. The thing I want to buy is available to purchase 

2. It’s the right value (pricing, quality)

3. You make it easy for me to buy that thing (good information, easy to use tech, low shipping costs)

Does what we do in retail media support any of those things? Certainty indirectly.

Many of the early stage retailers in the retail media space were grocers. Those grocers operate with very thin margins (1-3%). Retail media can offer access to effective, high-margin dollars that can be reinvested in things like lower shipping costs for online grocery, easier-to-use platforms, or growth marketing (which can deliver economies of scale and ultimately reduce the cost of goods for consumers).

In this, retail media can tick at least two boxes of the ‘customer wants’ - it indirectly reduces the cost of goods for customers, and it can reduce the cost of things like shipping.

But what of the supplier (brand), in this equation? Are they not simply paying a premium in support of better profitability at the retailer? Two considerations in this:

• There is an expected margin baked into media already - upwards of 50% - meaning that when brands advertise outside of retail, they’re paying premiums for multiple intermediaries and the places those ads appear. This is how Facebook can maintain a 35% profit margin.

• Return on investment tied to retail media is relatively strong, meaning that, regardless of the premium cost of the ad, it’s generating a positive return. 

But what about how we can directly enhance the customer experience? If we don’t buy the ‘more relevant ads’ perspective as the core customer benefit, how does retail media help our shoppers directly?

For this we turn to decades old shopper marketing activations - events, in-store demos, at-home sampling and more. Co-funded activities that allow customers to experience products, be delighted, or have a little fun along their shopping journey.

Within the sphere of retail media, these types of activities are relatively new, having historically sat on separate teams within the retailer. And they’re often slightly more complex to operate than programmatic ads, therefore they get a lot less attention.

But these more customer-centric types of retail media-powered activations work in spectacular ways, far beyond that of an ad in a retail search. 

For example, Sampler who has powered omnichannel trial-based experiences for companies including Kroger, Target, L’Oreal and more, ran a program with Starburst focused on increasing the quality of reviews on Target.com. By getting products into likely buyer’s hands, they were able to delight potential buyers and increase the quality of reviews by 11.5%. 

From incrementally to list building to repurchase rate and more, you can start to see how smart companies in this space are thinking about how retail media can directly influence multiple types of behaviors well beyond ROAS, AND serve to directly enhance the customer’s overall experience. 

The ecosystem to support this exists today, we just need to enact it at a greater scale.

Retail media has the ability to offer so much more to our customers than just relevant ads. It can:

• surprise and delight them

• create opportunities for trial

• build engaging experiences

• reduce the cost of shopping

• improve their shopping journey

• enhance content 

• and more

And as we think about how we continue to evolve this space for growth and longevity, we need to spend a lot more time focused on the benefits to our most important constituents. 

In this, we’ve solved the impossibly complex three body problem in retail media.

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