ROI, Not Price, the Selling Proposition of RFID
By George Anderson
Dennis Gaughan of AMR Research thinks vendors in the Radio Frequency Identification (RFID) technology space have a marketing and sales communication problem. They keep getting caught up in conversations about cost when they should be focusing on return on investment (ROI).
He writes, “There have been a few examples, but not enough empirical evidence to meet the strict Return on Investment (ROI) requirements that form the basis of most companies’ IT investment strategies. Demonstrate the value of a new technology, and people will buy. Focus exclusively on cost, and people will perceive little or no value.”
Mr. Gaughan understands that cost is part of the discussion when companies are looking at deploying RFID technology but that most are not making decisions based on that. What they want to know is why they should make the investment in RFID.
There are three key questions that organizations considering RFID are looking to have answered, he writes:
- What does RFID give me that I can’t currently do with existing technology today?
- What process changes will be required to take advantage of RFID’s capabilities?
- Are there other organizations that are using RFID successfully?
Moderator’s Comment: What does RFID give companies that they do not already have with existing technology? What process changes are required of companies
adopting RFID? Are there clear examples of retailers/suppliers achieving a significant ROI with RFID? –
George Anderson – Moderator
It is not that simple. Costs are a component in ROI. The problem is, only a segment of consumer products can show an ROI from RFID. These are high value products where RFID provides additional shrink control. The fact that a company knows a specific carton has left the building versus a carton has left the building in most cases is not that important. Product recall can be assisted by RFID, but how often does that happen? Retailers may be closer to an ROI from finding product in the backroom, but better procedures will achieve the same results.
As with most other technology innovations, success depends upon people more than the technology. Initial cost reduction can be used to calculate ROI for switching to the new technology. However, the long term ROI and biggest benefit depends upon how RFID is used. The major advantage is knowledge – of where the products are at any point in time and when they are put on the shelf and when they are sold (from scanner data, at this point in time, not RFID). Tracking scanner data with RFID information needs coordination. Tracking the consumer purchases and using that for effective assortment and replenishment demands process change and analysis. These activities enable companies to know their consumers better and to create competitive advantage which is necessary for long term ROI. Turning data into information is critical and that depends upon people.
The quick answer to the first question is that RFID eliminates the need for line of sight when tracking products. This leads to a myriad of productivity, marketing and control benefits. As for the second question, the key changes required are in technology – moving from one type of reader to another and a series of support devices and analytics – and planning/executing – actually using the collected data to pursue the organization’s goals. The last question is the trickiest one. No company that I’m aware of has shown ROI with RFID at the item level. At the pallet and case levels, companies like Wal-Mart and Metro, as well as the Dept. of Defense, are starting to show limited ROI.
Worthwhile technologies’ adoption speeds are accelerating. It took many years to get to the point where 50% of businesses had computers, fewer years to get to the point where 50% of businesses had personal computers, fewer years to get to the point where 50% of businesses has internet access, fewer years to get to the point where 50% of business people used cell phones, etc. The slowness of RFID adoption seems to prove the weakness of the business case. Every major retailer has plenty of “shelfware”: technology they bought that they hardly use at all. Who needs more of it? Great technologies reveal their value immediately, even to the unsophisticated. Wal-Mart had to hire the University of Arkansas to prove that RFID has value. If a retailer needs to hire a university to prove that a technology is worthwhile because the worth isn’t already obvious to experienced executives, what does that say about the business appeal of that technology? My family has been in the retail and wholesale hardware business for 96 years. We’ve learned that even if a tool is brilliantly designed and has a purpose, it might not have a customer.
It’s been this way with every technology innovation that’s come down the pike, from scanning to electronic shelf labels. In the brutal war at retail, it’s hard to find money in the budget for these things, and ROI predictions haven’t always come true. Perhaps most important with new technologies over the years: everyone always expects price to come down dramatically if they wait 12 or 24 months, or “just a little longer.” Trouble is, price often does come down dramatically in 12 or 24 months, which keeps the cycle going. In the end, the early adopters wind up paying the freight for the system vendors to achieve critical mass, at which point prices can come down for everyone else. The early adopters get that extra advantage of being there firstest with the mostest. It’s often a crapshoot over whether being early is really worth the investment. Sometimes yes, sometimes no.
ROI can be measured by numbers or it can be measured by an increase in positive perception. I find that many (not all) of the RFID “prove it” vendors are the same ones who stall any time change or expense is required of them, with “required” being the operative word. Always waiting for retailer mandates is no way to run a business and there are plenty of every day decisions that will always be up to the prudent vendor to face or deny . . . hiring additional sales people, bringing in an analyst, providing training, etc. RFID is the latest example of an OPPORTUNITY for small to medium-sized vendors to increase the perception of their readiness and foresight instantly, and I know of several who are doing just that; looking at it that way.
ROI should be the primary consideration for any action marketers take. RFID needs to sell itself based on increasing marketers’ profits. If it can’t, why should anyone do it?