Back in 2002, the standard approach to valuing a player was based heavily on the intuition of experienced scouts and a small number of accepted measures of a player’s physical ability. This may not seem so bad - what better way to make a decision than to consult an expert? Actually, this isn’t always a good choice. In his book ‘The Wisdom of Crowds’, James Surowiecki shows how experts are often less effective than we think. He shows that more often than not, an expert’s predictions are worse than those of a group of novices. This shows that statistical predictions can often outperform those of an expert.
In a retail context, category managers are our scouts and we have products instead of players, but the approach is fundamentally the same. We rely heavily on the intuition of our category managers and perhaps one or two metrics around profit for each product to select our team.
The innovation Beane and the As brought to baseball was to focus on both more and better objective metrics in order to value a player. They focused on metrics that better determined the players’ contribution to the team as a whole rather than their individual physical ability.
Some of the biggest retailers in the world have also adopted this approach. They use detailed analysis including not only the financial performance of products but also how substitutable and complementary they are with other products. This lets them select a great team of products rather than just a few stars that are expensive and don’t play well together. In addition, like Beane did for baseball, innovative retailers have reconsidered what defines a product as successful. Obviously how much profit a product generates is vital, but also key is how important the product is to customers, especially the customers that the retailer wants to attract and retain. For example, delisting an unprofitable product that is important for key customers is likely to result in the loss of the visit or the customer entirely.
The approach pays off. The As won 20 games in a row in the 2002 season and made it to the playoff for the World Series in both 2002 and 2003 despite having a player salary budget less than half of some other teams in the league.
For our retail innovators in this space, tests versus control stores repeatedly show the success of this approach. Selecting products based on the science rather than intuition delivers a permanent uplift in sales of between 5 and 10 percent. Analysis shows that when this approach of selecting the best team rather than the best players is taken, customers visit more frequently and buy more products.
So now is the time to ask yourself, are you playing Moneyball or are you in the comfortable embrace of experts?
This story was originally published in NZ Retail magazine issue 738, June / July 2015.