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QVC: Driving Sales in Real Time

 
1/24/2005
Service interfaces work best with customers when technologies and humans play to their strengths. This excerpt from Best Face Forward discusses how QVC maximizes sales with a highly effective hybrid approach of machine and human talent.

Editor's note: The "back office" is moving to the front office—technology is more often being used to perform customer-relationship roles, concludes a new book, Best Face Forward: Why Companies Must Improve Their Service Interfaces with Customers. Authors Jeffrey F. Rayport and Bernard J. Jaworski argue that as front-office automation develops, a firm's success will increasingly depend on its ability to combine the right balance of customer interaction: human, automated, and hybrid interfaces. This excerpt looks at how television shopping network QVC has mastered that art.

Since every minute of QVC programming is live (though shows may include B-roll or prepackaged video to show product demonstrations), nothing is scripted—no TelePrompTers. For every product presented, hosts have five lines of information and their own background research. The host typically occupies a set, either alone or with a product or brand representative, and directs her attention to one of three or four robotic cameras controlled by a line producer in a glass booth overlooking the studio. Hosts get some additional direction from their line producers through an earpiece. In that seemingly relaxed and natural setting, they sell at rates of hundreds of thousands of dollars an hour.19 Today, all shows originate in QVC's new production facility at Studio Park, in West Chester, Pennsylvania, where the network built a sixty-thousand-square-foot studio—one of the largest digital TV production operations in the world—housing a twenty-five-thousand-square-foot cutaway suburban home that contains most of the sets.

QVC has refined its use of real-time customer data and can check sales every six seconds.

The leverage on human talent is striking. Imagine asking the manager of a top department store—a Nordstrom or a Neiman Marcus—to introduce you to the top salesperson. If the manager obliges, then you'll likely meet a particularly polished and professional individual, perhaps an expert in men's suits or women's designer clothing. How much annual sales volume can this person achieve in such a store? The truly skilled might sell several million dollars of merchandise. At QVC, the average per capita sales productivity of any one host is $200 million a year, given QVC's nearly $4 billion in U.S. revenues and approximately twenty sales hosts on staff at any given time. The top hosts produce far more. Several years ago, one host was preeminent—Kathy Levine, who has moved to HSN. A former school teacher who auditioned in QVC's first casting call in 1986, she was instrumental in building the network's jewelry category. Today, jewelry represents approximately 30 percent of QVC's total programming, and the resulting revenue makes QVC one of the largest jewelry retailers in the world. Levine's individual talent could move several hundred million dollars of jewelry a year. Similarly, Bob Bowersox, the eleven-year host of "In the Kitchen with Bob," has sold about 900 tons of cookware at QVC. Both examples underscore the leverage on human talent that machine-led hybrid interfaces can provide.20

So how does QVC's interface system make so few people so productive in selling goods? One obvious answer is national reach. But HSN, whose signal reaches roughly the same number of households, is only half as productive in revenues. Another obvious answer is unique talent. But competitors can hire that away, as HSN did with Levine.

A machine-led hybrid interface in action
A more complex answer relates to the productivity of the interface system itself. QVC interacts with customers through several interfaces more or less simultaneously, some of which are outbound (the broadcast), some inbound (the toll-free phone lines), and some both (the Web site). This configuration enables the network to glean real-time market intelligence over the phone lines and the Internet as it broadcasts programs. On the first of many visits to QVC, we witnessed this interface system in action one weekday in the late 1990s. The line producer that December morning was beginning a segment at the top of the hour featuring Kathy Levine as host. She was presenting thirty minutes of 14-karat-gold jewelry for women looking for something special to wear during Hanukah—talk about a niche market! At the start of the jewelry show, she introduced her guest, a bearded man dressed completely in black, who designed the jewelry line. With Levine's prompting, the designer began rhapsodizing about how versatile his designs were and how festive QVC shoppers would look wearing them during the holidays.

Levine asked him how someone might wear a certain gold necklace. The guest thought for a moment, then proclaimed that the necklace would look fabulous on a black angora sweater. Levine clearly liked this idea, and they discussed it a minute or two more. Back in the control room, we noticed that the line producer's screens began to exhibit a pattern once the guest mentioned the black angora sweater: The first screen displayed inbound call volume, and the numbers were rising rapidly. The next screen showed conversion of incoming calls to orders, and soon those numbers were rising, too. The final screen showed inventory levels of on-air items in the warehouses, and the numbers for the necklace began to decline. On the set, Levine was searching for new angles on the necklace, and so she asked her guest what other apparel might suit the piece. Again, he thought for a few seconds, then suggested a red angora sweater—for the Christmas season. That might not have appealed to the Jewish niche audience. On the screens in the control room, the sales pattern reversed itself. Call volumes began declining, conversions to purchase fell, and inventory levels plateaued. So the line producer barked into Levine's earpiece, "Kathy, get back to the black angora sweater!" Without missing a beat, Levine said, "Well, of course, red is nice, but black is always perfect with gold." Call volumes and conversions started rising again, and inventory levels began to fall.

Over the years, QVC has refined its use of real-time customer data and can check sales every six seconds. Since the merchandising mix has evolved to include more considered purchase items such as large screen televisions, this sales volume per minute information has led to occasional breaks from the six-to-ten items per hour format. A squad of PhDs on staff analyzes sales volume per minute throughout product presentations to determine the optimal length of time each product should remain on air in order to maximize segment revenue.

In terms of 2003 revenues, QVC was the number three TV network in the United States, behind only General Electric's NBC and Viacom's CBS.21 But QVC behaves nothing like a traditional broadcast network. It is an interactive medium with an outbound channel for the broadcast signal and an inbound channel for audience response.22 On a national mass market scale, QVC does what great salespeople always do when they make a pitch: They read client reactions, and they adjust their approach and behaviors to trigger a positive response. Where a salesperson can normally sell only one account at a time, QVC's hosts sell to hundreds of thousands of households simultaneously, adjusting what they do to match viewer segments that self-organize dynamically based on the products and brands on air. QVC does not buy Nielsen research, and its executives ignore standard TV metrics such as reach, frequency, and audience share. Rather, they determine and adjust their presentation strategies based on how many calls and Internet orders come in during each minute of broadcast time. Meanwhile, the network's capacity to take calls from viewers on air—so-called testimonial or T-calls—reinforces the credibility of the presentation, and helps create a sense of shared experience among QVC's viewing audience. QVC's customer service representatives often invite callers who have ordered an item before to discuss their experience on the air. When the line producer can slot the call into the show, the caller can talk to the people appearing on her television. She can talk about how much she loves a particular product on national television from her own home. In so doing, she provides the most effective risk-reduction mechanism known for prospective shoppers—namely, another customer's positive word-of-mouth delivered with mass-media efficiency.

QVC does not buy Nielsen research, and its executives ignore standard TV metrics such as reach, frequency, and audience share.

Interfaces and linkages
Managing an interface system to produce such high levels of trust in a consumer direct channel is no mean feat. The interface system is only as strong as its weakest interface and its weakest link. If QVC's broadcast signal drives orders, but its call centers alienate customers by keeping them waiting, then the virtuous cycle disintegrates. If all of QVC's interfaces perform well, but the hosts and call center representatives promise delivery times that the distribution centers cannot fulfill, then the virtuous cycle also crumbles. This interdependence underscores an essential principle of interface systems design: Companies must optimize their interface systems along two dimensions—separate (performance of individual interfaces) and relate (linkages among interfaces in the system). Striking the right balance is a subtle business, and even small changes to an interface system can have a huge impact. QVC learned this lesson the hard way. In May 2001, attempting to improve its on-screen look, the network introduced what management believed were more appealing and intuitive graphics and ran them for three weeks. Despite earlier testing, the new design proved too radical a change for viewers. Overall sales were down 20 percent. No matter what QVC did with its broadcasting, merchandising, and planning, it could not turn around these results. Finally, leadership discontinued the test and reverted to the status quo ante; with the old graphics back, sales immediately returned to normal levels. In this situation, nothing had changed among linkages within the interface system, but the context of one interface had temporarily weakened—and that weakness dragged the entire system down. This outcome is less surprising given how QVC generates "traffic." Word-of-mouth referrals draw 20 percent of QVC shoppers, but 70 percent discover QVC through channel surfing. To retain surfers, the network must reinforce consistent impressions among viewers over time—impressions of its always agreeable hosts, presentation style, and graphics—to reassure arriving viewers that they have returned to a context that they know and trust.28

Reprinted by permission of Harvard Business School Press. Excerpted from Best Face Forward: Why Companies Must Improve Their Service Interfaces with Customers by Jeffrey F. Rayport and Bernard J. Jaworski. Copyright 2005 Jeffrey F. Rayport and Bernard J. Jaworski. All rights reserved.

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Jeffrey F. Rayport is chairman and founder of Marketspace LLC, a subsidiary of Monitor Group.

Bernard J. Jaworski is vice-chairman of Marketspace LLC and heads its Monitor Executive Development business unit.

Why QVC Matters

by Jeffrey F. Rayport and Bernard J. Jaworski

In summary, QVC sells high-quality products, at fair prices, with truthful sales hosts who, in effect, offer neighborly advice across a backyard fence. Whatever the company does in delivering on its brand promise of quality, value, and convenience is reflected in its interface system, which then drives sales while building consumer trust. Since QVC has no physical presence for most consumers, since its customers buy few truly indispensable items, and since they can find roughly equivalent products at countless brick-and-mortar retail outlets, QVC must work harder to provide compelling reasons for its 7 million active shoppers to keep buying. And it has. By tapping hybrid service interfaces—largely machine-led—QVC has established unparalleled levels of consumer trust. In addition, QVC's amalgam of people and machines has helped it realize noteworthy levels of retail productivity. Just compare QVC to Wal-Mart and Sears: On a sales-per-employee basis, QVC achieves $444,455 in sales per capita compared to Wal-Mart's $170,886 and Sears' $165,157. On an EBITDA margin basis, QVC achieves $92,091 in margin per capita compared to Wal-Mart's $12,693 and Sears' $12,570.31

Not surprisingly, Wall Street values Wal-Mart at a single multiple of revenues, Sears at a multiple of just one-quarter of revenues, and QVC at three times revenues. QVC's enterprise value was recently established at $14 billion in a transaction in mid-2003, when Liberty Media acquired the remaining 57 percent of QVC from Comcast for nearly $8 billion.32



Reprinted by permission of Harvard Business School Press. Excerpted from Best Face Forward: Why Companies Must Improve Their Service Interfaces with Customers by Jeffrey F. Rayport and Bernard J. Jaworski. Copyright 2005 Jeffrey F. Rayport and Bernard J. Jaworski. All rights reserved.

Footnotes:

19. Ibid.

20. Interviews with QVC executives by author, August 2004.

21. John M. Higgins, "Top 25 TV Networks," Broadcasting and Cable, 1 December 2003 (accessed 1 April 2004, subscription required).

22. In the early days of television, the UVF spectrum assignments went to first movers—NBC, ABC, and CBS—via their affiliates. Independent TV stations in local markets got double-digit channels in the UHF spectrum. Direct-broadcast satellite and digital television eliminate the relevance of such assignments.

28. QVC must also seek favorable channel "adjacencies" by placing itself on cable dials in "neighborhoods" within viewers' so-called clicker rotations. That means negotiating channel assignments contiguous to the broadcast networks' affiliated stations. Popular channels are in the low numbers, and so QVC must be among them to capture channel surfers.

31. Revenue, EBITDA, and employee figures from: Analyst Report, "Liberty Media," Morgan Stanley, 7 January 2004; Press Release, "Liberty Media Corporation Provides Fourth Quarter and Full Year Supplemental Financial Information and 2004 Guidance," Liberty Media, 15 March 2004,(accessed 1 April 2004); Sears, "Annual Report," 2003; Press Release, "Sears Reports Fourth Quarter 2003 Results," Sears, 29 January 2004 (accessed 1 April 2004); Wal-Mart, "Annual Report" 2003; Analyst Report, "Wal-Mart Stores Inc."; McDonald Investments Inc., 2 March 2004.

32. Liberty Media Press Release, "Liberty Media Corporation to Acquire QVC, Inc.," 3 July 2003.