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Case Best Buy: Creating a Winning Customer Experience in Consumer

Sage Business Cases©

At the end of 2014, Best Buy was one of the largest retailers in the United States, with over 1,400

domestic stores, a strong web presence, and a trusted brand name. Best Buy had held its own against

the onslaught of e-commerce while many other electronics retailers such as Circuit City had gone out of

business. Over the past few years, however, Best Buy’s performance had flagged.

The retail market was experiencing a rapid shift toward online shopping, epitomized by the rise of

Amazon. Customers would visit physical consumer electronics stores such as Best Buy to try out

products but end up buying from online retailers. This practice, called “showrooming,” was a significant

threat to Best Buy. The company had responded by offering a price-matching guarantee in 2013.

Although the price-matching guarantee had reduced the threat from showrooming, Best Buy had to

contend with lower profit margins and the continued perception that Amazon offered lower prices and

more choice.

Best Buy was also challenged by the growing influence of millennials, who preferred to shop online and

had much higher expectations for a physical retail store experience. The millennial segment was growing

in size and importance, but it was underrepresented in Best Buy’s customer base. Best Buy needed to

improve its appeal to millennials by creating an online as well as offline customer experience that would

exceed their expectations.

Under the leadership of recently appointed CEO Hubert Joly, Best Buy had taken the initiative to win in

the changing marketplace. For all the strength of online players such as Amazon, Best Buy had powerful

physical assets such as its stores, its vast employee base, and its Geek Squad service operation. How

could the company leverage these privileged assets to create a winning customer experience? How

could it improve its relevance and appeal to millennials? Best Buy had recently sponsored a business

challenge competition at the Kellogg School of Management at Northwestern University. The company

received recommendations from three winning student teams who suggested strategic initiatives in

three areas—improving the in-store experience, enhancing the ownership experience, and offering a

rent-to-own model. Although all these initiatives sounded promising, Best Buy needed to decide which

would best deliver on its strategic objectives.

Headquartered in the Minneapolis suburb of Richfield, Minnesota, Best Buy had been founded in 1966

in Saint Paul by Richard Schulze and Gary Smoliak 1 as an audio specialty store called Sound of Music. It

sold high-fidelity audio stereos to a core customer base of 15- to 18-year-old males. In 1983, with seven

stores and $10 million in annual sales, Sound of Music changed its name to Best Buy Company and

repositioned itself as a consumer electronics store. To expand its customer base, Best Buy began

offering home appliances and VCRs. In 1987, Best Buy debuted on the New York Stock Exchange. Best

Buy’s subsidiaries included CinemaNow, Pacific Sales, Best Buy Mobile, and the Geek Squad. Best Buy

was named “Specialty Retailer of the Year” by Discount Store News in 2001, was awarded “Company of

the Year” by Forbes magazine in 2004 and was included on Fortune magazine’s “List of Most Admired

Companies” in 2006.

At the end of 2014, Best Buy employed more than 140,000 people, including full-time, part-time, and

seasonal employees. It generated $42.4 billion in revenues in 2014, down from $45.1 billion in 2013. The

revenue decline in 2014 was largely attributable to the divestment of Best Buy’s businesses in Europe

and China. Gross income stood at $8.4 billion, down from $9.5 billion in 2013. The company’s stock price

had tripled from its 2012 lows and was trading near its five-year high at the end of 2014. The buoyant

stock price reflected the market’s expectations that Best Buy’s executive team could turn around the

company’s fortunes. Yet the rise of online shopping and millennial customers put real pressure on Joly’s

team to deliver on high investor expectations.

The Consumer Electronics Industry in 2014

In 2014, total sales for the 100 largest consumer electronics retailers were $130.9 billion, down 0.4

percent from 2013. 2 Best Buy remained the leader in the consumer electronics market, with a market

share of 22.9 percent in 2014, compared with 22.8 percent in 2013. 3 However, Amazon was gaining

share quickly, with a 13.8 percent market share in 2014, up from 11.9 percent in 2013. Amazon had set

a high bar in terms of low prices and convenience. Customer loyalty in the consumer electronics

business was low, with almost 88 percent of customers buying from multiple retailers. The consumer

electronics business was undergoing a massive technology transformation, with increased reliance on

smartphones and apps, a collective move toward e-commerce, and new technologies being introduced

in retail stores.

Competitors

A sluggish economy and brutal competition chipped away at Best Buy’s once dominant presence in the

consumer electronics market. In addition, consumers’ determination to find bargain prices online and

willingness to engage with brands on multiple channels, as well as the rising popularity of Internet

retailers such as Amazon had gradually eroded Best Buy’s competitive position. Best Buy found itself in a

battle not only with Amazon but also other big-box retailers such as Target, Walmart, and Sears, which

began offering consumer electronics in their stores and online.

Amazon

Founded in 1994, the online behemoth Amazon had changed the face of traditional retail by offering a

vast product selection, low prices, and relentless innovation. Its information-rich product pages made it

a destination for product research. Amazon also exercised influence over offline retail, drawing shoppers

to its site before and even during their in-store visits. Amazon’s competitive advantage lay in the sheer

breadth of product choices it offered shoppers, the convenience of shopping from home (or anywhere),

personalization, efficient customer service, and a well-developed delivery network of warehouses and

strategically placed fulfillment centers that allowed it to cut shipping costs. Already ruthlessly efficient,

Amazon in 2005 launched its Prime subscription service that for a flat annual fee offered members

expedited (two-day) shipping with no minimum purchase amount.

Target

In May 2014, America’s second-largest discount retailer, Target, announced that it would enhance in-

store, mobile, and online services to provide shoppers with a superior experience. Target’s digital

platforms included the coupon app Cartwheel, Target Subscriptions, and its online store. It planned

upgrades to the Target app such as smart shopping lists, personalized offers, and expanded offerings in

Asus

Highlight

the electronics department. The company offered free in-store pickup services and planned to add a

“ship-from-store” feature to give shoppers the added convenience of shopping online for same- or next-

day delivery. Indeed, Target rolled out a ship-from-store program in 140 stores ahead of the 2014

holiday season that enabled it to reach an estimated 91 percent of U.S. households by ground transit

within a couple of days. Target was playing catch-up with Best Buy, which was already shipping from all

of its stores by the time Target announced this feature. Best Buy had introduced ship-from-store in 400

stores during the 2013 holiday season and was shipping from all stores by January 2014.

Walmart

Walmart, America’s largest retailer, had been slow to respond to the online shopping threat, but it was

accelerating its efforts. In October 2013, Walmart announced the launch of two order fulfillment centers

(warehouses) to handle online sales and reduce delivery costs and fulfillment times. This brought the

total number of company-owned fulfillment centers to three, compared to Amazon’s forty centers

throughout the United States and Best Buy’s eight regional distribution centers. Walmart was losing

ground to Amazon: its e-commerce revenues were only 2 percent of its overall sales in the United

States, leading CEO Doug McMillon to announce an online order fulfillment program similar to Amazon’s

Prime subscription service. This service would charge shoppers $50 annually for unlimited free deliveries

of select items within three days—but it would not be available until the 2015 holiday season.

Consumer Trends in Electronics Retail

Electronics retail was heavily influenced by e-commerce, with 84 percent of shoppers using digital

channels for shopping-related activities before or during their most recent trip to the store. Of these

shoppers, 75 percent reported that social media influenced their shopping behavior. In another

significant shift, mobile devices had become ubiquitous and were used to make purchases by almost 75

percent of digital shoppers. Significantly, consumers who used a mobile device during their shopping

journey converted at a 40 percent higher rate.

Macroeconomic conditions such as a persistent unemployment rate and decreases in household income

also exercised a disproportionate impact on lower- to middle-income customers. Electronics and

appliance stores’ share of discretionary consumer spending had trailed other categories such as

automobiles and home improvement since 2007. This decrease was partly attributable to a sales decline

in traffic-driving categories such as movies, music, and games. However, new releases in entertainment

categories and iconic hardware (such as the Apple iPhone) generated significant traffic and cross-selling

opportunities.

From 2013 to 2014, store traffic declined as Amazon continued to gain favorability with millennial

customers. Meanwhile, online traffic continued to increase year-over-year at a steady pace.

Multichannel spending had increased, and multichannel customers were less likely to churn than single

channel shoppers. Even in-store spending was likely to be digitally influenced as customers’ product

research moved from in-store to online or mobile. Best Buy’s data revealed that deeper analysis was

needed to explore the gaps and key barriers in the company’s ability to convert digital and mobile

browsing into purchases.

Rise of Millennial Customers

A key demographic shift taking place in the United States was the rise of millennial customers.

Millennials (also known as Generation Y), the demographic cohort born between 1979 and 1997,

comprised 31 percent of the U.S. population in 2014 and had an annual buying power of almost $1

trillion. Millennials’ transactions with Best Buy had dropped by 35 percent over the last four years,

compared to 12 percent for the older Generation X. Consumer electronics formed an indispensable part

of millennials’ lives, even as they faced the economic challenges of college debt and unemployment.

This segment preferred to experience and discover the product in alternative spaces; the average

millennial visited as many as fourteen online sources for product information before buying. Millennials

tended to favor brand value over brand loyalty, sought personalization and real-time interactions, and

expected integrity and upfront communication. They lacked patience and expected retailers to respond

immediately to their concerns and needs.

Millennials were often referred to as a generation in flux with their life goals. Theirs was a mindset that

embraced instability and tolerated—or even enjoyed—recalibrating careers, business models, and

assumptions. Authenticity and authorship formed their core values. They wanted to feel closer to the

process of how the product was made; they wanted to experiment and discover the product in spaces

where they felt part of a unique community.

Raised by individualistic boomer parents, millennials were individualistic themselves. Always on the

lookout for quid pro quo when engaging with brands, millennials were willing to trade their data for

rewards or more personal experiences. They used brands to identify, express, and support what they

found personally important. Millennials also were very receptive to brand loyalty programs and rewards.

They were eager to share or digitally capture their experiences, and inhabited a visual culture that

thrived on instantaneous stories and sought instant gratification. They were “digital natives,” having

grown up using technology fluently and fluidly. For them, digital wasn’t just about bringing the offline

online—it was also about creating new spaces and behaviors to play, share, and consume experiences.

Best Buy had experienced a decline in transactions with millennials since 2010. Even as consumer

perceptions of Best Buy pricing remained generally unchanged, millennials viewed Best Buy as having

higher prices relative to Amazon. Millennials displayed a strong preference for Amazon in general and a

strong preference for Amazon over Best Buy in particular. By contrast, the boomer generation had a

high affinity for the Best Buy brand. For Best Buy to continue to grow, it needed to enhance its appeal to

millennials. To do this, it would need to understand millennials’ expectations of retailers in order to

create a customer experience that they would find compelling.

As e-commerce matured, the customer shopping experience was changing. In the early days of e-

commerce, customers loved the convenience of shopping online. However, they gradually realized that

physical stores offered unique advantages, such as the ability to “touch and feel” products and to

receive guidance from expert salespeople. The future of retail called for a blurring of boundaries

between physical and digital to create a hybrid retail customer experience. Online retailers such as

Amazon and Blue Nile were trying to become more physical while physical retailers were trying to

become more digital. In the fall of 2014, Amazon was considering opening a brick-and-mortar store in

New York City. With concepts such as same-day delivery, online ordering, and in-store pickup gathering

momentum, Amazon wanted to capitalize on those trends and connect with customers outside the

virtual world.

Omnichannel retailing referred to the use of multiple channels to provide a seamless retail customer

experience. These channels could include retail stores, online stores, mobile stores, mobile applications,

telephone sales, catalogs, and other methods for customer interaction. For example, customers

frequently switched between devices while conducting research online, then completed a purchase in-

store. The key for retailers was to provide a consistent and complementary shopping experience as

customers switched channels.

Omnichannel retailing aimed to bridge the gap between brick-and-mortar stores and online and mobile

shopping experiences. It involved using customer data to personalize the shopping experience and reach

customers wherever they wanted to engage. Pop-up shops, showrooms, and kiosks, paired with tailored

digital experiences, enhanced the traditional customer journey. The proliferation of digital consumption

and social media channels had made consumers adept at seeking out information across a plethora of

channels. It was becoming clear that the retailers who could create the best omnichannel experience

would win the battle for the consumer heart and wallet.

Online-to-Offline Commerce (O2O Commerce)

Alongside the growth of online shopping, the links between online and physical shopping were

becoming stronger. Online to offline commerce (O2O), for example, was gaining ground. In O2O

commerce, customers would be acquired online and brought to physical stores to complete the

transaction. Players such as Groupon and OpenTable had pioneered this concept. The majority of

shopping was still done offline because some offline experiences—such as those requiring human

interaction (e.g., restaurants, spas)—could not entirely be transferred online. Retailers such as Macy’s,

Sears, and Walmart were quick to embrace this strategy to counter the success of pure-play online

retailers such as Amazon. Customers at Macy’s, for example, could order a product online and pick it up

from a physical location such as a store or other pickup location. O2O commerce accomplished two

crucial customer needs—avoiding shipping costs and receiving the product sooner—and allowed

physical retailers to provide instant gratification and easier returns than their online rivals. In 2012,

more than half the orders at Walmart.com were picked up at Walmart stores. Sears even added a drive-

through service that allowed customers to return or exchange purchases without leaving their cars.

Integrating Physical and Online Merchandise

Retailers such as Nordstrom began offering features that allowed consumers to search an individual

store’s inventory online. Nordstrom had combined its online and offline inventories such that if the

online store ran out of an item of clothing, Nordstrom would ship the item to the customer from a

physical store that carried it. Macy’s also had integrated inventory, and its 202 physical stores could

send items to its online customers. Best Buy had a version of in-store pickup as early as the 2008 holiday

season and began rolling out ship-from-store in fall 2013.

Smartphones and Mobile Shopping

By 2014, smartphones enjoyed a 60 percent penetration rate in the U.S. population. Smartphones and

tablets had become the device of choice for web surfing and shopping. More than half of adult shoppers

used their smartphones in stores to help with purchasing decisions. 6 They investigated prices and

reviews or called friends for advice. Customers continued to show a greater interest in identifying

products on their mobile phones, sharing and posting information on social media, and even paying for

products and services by phone. With such direct access to information influencing the purchase

decision, stores were forced to keep prices competitive and online stores active and stocked.

Although the growth of digital and mobile commerce meant high traffic online and mobile versions of

retailers’ sites, the mobile channel was dogged by low conversion rates. The transaction amounts were

lower, and the churn rate was higher. Many retailers including Best Buy had low-performing mobile

apps.

Best Buy’s Strategic Response

In late 2012, Best Buy appointed a new CEO, Hubert Joly, who declared his intention to revamp the

brand in a campaign called “Renew Blue.” Joly sold off Best Buy’s European stores, trimmed its

workforce, and announced that Best Buy would pursue an omnichannel retailing strategy to reinvigorate

the customer experience. This strategy meant merging its formerly independent in-store and digital

operations and making its website easier to use by offering product recommendations and a “store

pickup” button. Best Buy made more than 200 changes to its online store and reduced the number of

clicks to purchase a product from 8 to 3.

The company leveraged its competitive advantages—scale and location—to take the fight to Amazon.

Part of “Renew Blue” included a price-matching policy to compete against Amazon and a push for

legislation to impose state sales taxes on online retailers. Yet Joly and his team needed to do more. They

needed to capitalize on the advantages of Best Buy’s physical footprint. Even as online shopping surged,

many customers preferred to pay with cash. Some customers did not have bank accounts or credit

cards, while others preferred cash because they did not feel safe about offering financial information

online. Another advantage that a physical store held was same-day delivery and return. To execute an

omnichannel strategy, Best Buy needed to break down the boundaries between online and offline

shopping. Joly and his team also needed to tackle the consumer perception of poor in-store customer

service. Customers expected sales associates to be experts on products and to be knowledgeable about

customers’ past purchases and preferences.

The Best Buy Business Challenge

To get fresh ideas on dealing with its strategic challenges, Best Buy created a business challenge for

students at the Kellogg School of Management. Student teams were asked to analyze Best Buy’s

business challenges and to propose strategic initiatives to meet them. Several teams competed and the

three winning teams presented their ideas to Greg Revelle, Best Buy’s newly appointed chief marketing

officer. The teams’ recommendations focused on three key areas: the first set of initiatives focused on

leveraging privileged assets to create a superior in-store experience; the second set sought to add

services that would enhance the ownership experience for consumer electronics products; and the third

set involved creating a rent-to-own plan for smartphones.

1. Improving the In-Store Experience (Leveraging Physical Assets)

One way that Best Buy could wrest the initiative back from companies such as Amazon was to improve

the customer experience by leveraging its privileged assets, which included physical showrooms, Geek

Squad service, and sales associates (“Blue Shirts”). This initiative would address the competitive threats

faced by the company and also issues relevant to millennials through its focus on service.

Matching Customers With Products

Studies showed that consumers expected sales associates to demonstrate their expertise to

complement the information consumers could get online. 8 Consumers also expected sales associates to

know their preferences and past purchases. More than two-thirds of customers (69 percent) expected

associates to carry a mobile device for real-time information on products, inventory, return policy,

warranty information, past purchases made by the consumer, and product recommendations. The

message was clear: sales associates had to be experts and advisors, not merely sales people.

Millennials felt overwhelmed by the sheer amount of online information and the dizzying array of

available products and services. Therefore, they expected sales associates to help them with their

purchase decisions, especially after they had narrowed down their choices with online research. Best

Buy could become the preferred consumer choice by intelligently matching customers with products.

One way to achieve this was by leveraging the expertise of the Blue Shirts. Profiles of selected Blue

Shirts could be placed on digital assets along with information on their domain expertise, store location,

and their contact details. Customers could search Blue Shirts based on their expertise and location, and

send questions to them. The idea was to create a more personal relationship with millennial customers

while generating sales and service leads at the same time. To achieve this, Best Buy would have to invest

in training its salesforce to ensure superior product knowledge across platforms. The Blue Shirts also

needed access to customer information to improve conversion. Although 70 percent of people who

entered Best Buy came with the intent to buy, only 46 percent of them ended up buying a product or

service, resulting in 24 percent in lost opportunities in-store. However, Best Buy would need to

determine what percentage of the Blue Shirts qualified for such training and estimate training costs.

Another option was to replicate the in-store sales experience online. Inquiring about customers’

preferences as they conducted online searches could generate a shortlist of best product candidates.

This would enable customers to discover the perfect product for their needs. The in-store experience

could be augmented with product information from online resources, including ratings and reviews

aggregated from social media, competitor stores, and third-party experts such as customers who had

already bought the product. Data showed that offering product reviews produced an average increase

of 18 percent in sales. Fifty-eight percent of consumers preferred sites that offered reviews, and 63

percent were more likely to buy from a site that offered user reviews.

Adding useful product reviews was fairly simple—a number of software tools and plug-ins made this

possible. To make a product more persuasive, Best Buy could also use third-party review providers such

as Reevoo or Bazaarvoice. Best Buy could also email customers post-purchase to ask for reviews on

product pages. Relevant reviews could be used in offline sales, advertising, and print ads. For this, Best

Buy would need to invest in a content management system. The combined effect of training and

improved website experience would lead to an estimated 1 and 2 percent sales increase in Years 1 and

2, respectively.

About 30,000 of Best Buy’s 140,000 employees were sales personnel. Best Buy estimated that about 50

percent of its salesforce would qualify for advanced training in the first year, with the remaining 50

percent to be trained in Year 2. Training each sales associate would cost about $1,500. Upgrading the

existing online shopping user interface with personalized product suggestions would cost Best Buy an

estimated $50 million. Equipping Blue Shirt sales associates with portable tablet devices would cost

$500 per unit. Product curation through a content management system, along with maintenance,

update, and data analytics services could cost the company about $1 million per month, which would

include the licensing fee for third-party product review providers.

Creating Stores-Within-a-Store

Best Buy could partner with major consumer electronics manufacturers to create “Stores-Within-a-

Store” (SWS). The SWS idea would emulate the practices of department stores such as Macy’s, which

offered dedicated display spaces featuring prominent designer names. Best Buy could create

relationships with well-known consumer electronics brands such as Apple, Samsung, and Microsoft to

create focused displays for each brand. SWS would allow technology brand partners to control their

merchandising and to showcase solutions involving a variety of products, and would also respond to

consumers’ desire to touch, feel, and experience cutting-edge products.

Best Buy had a total of 1,400 stores across the United States with cumulative yearly store traffic of 2

billion. Of these stores, 10 percent would be selected to pilot the SWS concept. Each pilot store would

have two SWS with an area of 1,000 square feet for each. SWS would benefit Best Buy in several ways: it

would increase sales due to effective merchandising, increase cross-selling of accessories within the

SWS, and generate a leasing fee that Best Buy could charge to original equipment manufacturers

(OEMs), as well as a “traffic fee” that Best Buy would charge the OEMs for each customer who entered a

SWS.

SWS would produce incremental revenues of $100 per square foot per year in the area covered by the

SWS. The company estimated that 50 percent of customers entering the pilot stores would explore the

SWS. Best Buy could collect from OEMs a traffic fee of 1 cent per person and a leasing fee of $2 per

square foot per month. An estimated 5 percent of customers entering the SWS would spend an

incremental $20 per person on accessories. Best Buy’s margin on incremental revenues was 20 percent

for product sales and 25 percent for accessories.

The cost of a dedicated domain space included the cost of planning, creating, operating, and labor

charges. The one-time cost for Best Buy to set up a 1,000-square-foot space in a store would be $25,000.

Training would cost $5,000 per employee per year, or $10,000 per store per year. The OEMs (Apple,

Samsung, and Microsoft) would supply the merchandise.

2. Enhancing the Ownership Experience (Best Buy 360)

Best Buy was mindful of the growing importance of digital products in its portfolio. Digital products

required more buyer handholding than other consumer durables because of their complexity and the

rapid pace of change in digital technologies. Customers were also prone to losing and breaking them. In

response to these customer pain points; Best Buy was considering launching a “digital concierge” service

(codenamed “Best Buy 360” or BB360) that could provide customers with peace of mind across the

entire ownership experience. This program would include services related to delivery, installation,

repair, maintenance, and protection of digital products. BB360 would create new revenue streams from

subscription services, installation and maintenance fees, and incremental sales of parts and accessories.

The program would also enhance customer loyalty and customer lifetime value through a higher share

of wallet. However, BB360 would also create incremental costs for Best Buy in providing the customer

benefits and hiring additional services staff for the program.

BB360 would be limited to three product categories—entertainment (TVs and gaming consoles);

computing products (laptops, notebooks, and desktops); and communication products (smartphones

and tablets). The program would be structured into three membership tiers: Silver, Gold, and Platinum.

All BB360 members would get free delivery and installation for products within the three categories that

they bought from Best Buy (in stores or online). Best Buy would also install products bought from other

retailers, including Amazon, at standard rates for Silver customers and at 25 percent and 50 percent

discounted rates for Gold and Platinum customers, respectively. It was expected that Silver customers

would not request installation services for products bought outside Best Buy because they would have

to pay the standard installation rate. However, Gold and Platinum customers were expected to buy two

and four installation services per year, respectively, to take advantage of discounted installation

services. On average, an installation job would be priced at $165 before discounts, and the average cost

of an installation job for Best Buy was estimated to be $100.

BB360 members could bring in their digital products purchased at Best Buy for free repair and

maintenance. Silver, Gold, and Platinum members would also receive complimentary remote

troubleshooting support 24/7 on the phone and online, as well as in-store repairs. For Gold and

Platinum members, Best Buy would also provide a limited number of free house calls for repair that

would cover the labor costs of the service visits. The house call benefit was capped at two repair service

visits annually for Gold members and up to five visits for Platinum members. Each house call would cost

Best Buy $80. While Best Buy did not know how many house calls customers would actually request, it

was being conservative in assuming that all customers would take full advantage of the house calls. In

addition to the cost of free house calls, the repair and maintenance benefit would cannibalize the pre-

BB360 revenues from providing these services to customers. Before the BB360 program, 10 percent of

Silver, 20 percent of Gold, and 25 percent of Platinum customers were requesting two repair work

orders per year per customer. The pre-BB360 revenues per work order for Best Buy was an average of

$100 per work order and the margin on each work order was 50 percent. These revenues and margins

would be lost after the BB360 program rolled out, so they would need to be accounted as a cost of the

program.

Under the protection plan, only products purchased at Best Buy would be covered for warranty and

insurance. Studies showed that tech products differed in their service and repair needs. For example,

TVs had a 7 percent repair rate, whereas PCs—including desktops, laptops, and notebooks—had a 24

percent repair rate. According to Consumer Reports, only about 15 percent of users acquired a new

phone because the old one broke. Under the BB360 program, Best Buy would offer an insurance

program that would protect owners against accidental breakage and theft; the program would be

provided free of cost to Gold and Platinum members. Best Buy would buy third-party insurance at a cost

to Best Buy of $8 per month for Gold members and $16 per month for Platinum members.

Best Buy estimated that 250,000 customers would sign up for the Silver tier, 100,000 for the Gold, and

50,000 for the Platinum in Year 1. In Year 2, enrollments would go up to 500,000 for Silver, 150,000 for

Gold, and 75,000 for Platinum. Best Buy also estimated that the BB360 program would result in

incremental revenues of $500 for Silver members, $1,000 for Gold members, and $2,000 for Platinum

members on an annual basis. These incremental revenues would arise from greater loyalty and hence an

increased share of wallet. Finally, BB360 would produce incremental revenues from sales of parts and

accessories during installation and repair services of $75, $150, and $250 per customer for Silver, Gold,

and Platinum customers, respectively.

3. Innovating on the Business Model (Rent-to-Own Model)

Millennial customers were increasingly shifting from a product ownership to a product sharing mindset.

The desire for convenience and lower disposable income fueled the rental culture exemplified by the

emergence of services such as Zipcar (car-renting), Spotify (music), Uber (ride-sharing), AirBnb (home

rentals), Rent-the-Runway (fashion), and Divvy Bike (bike-sharing). Millennials liked the rental model

because it made the latest products and gadgets more affordable and allowed them to try out a product

before committing to a purchase.

Best Buy saw an opportunity to create a rent-to-own (RTO) model that would take advantage of its

extensive physical presence and would be difficult for Amazon to replicate. It could rent consumer

electronics, specifically smartphones. With service providers such as Verizon and AT&T looking to move

away from phone subsidies and leaving customers to independently acquire their own devices, Best Buy

could step into the void. It could offer the latest, most popular smartphones for a monthly rental fee,

with an option to buy the phone at any time during or after the rental period. The RTO arrangement

would involve leasing an electronics product to a customer, who would make monthly payments in

exchange for immediate access to the product. The RTO lease would also include a purchase provision

that would allow the customer to own the product after a predetermined number of payments had

been made to the retailer. The RTO model would be particularly attractive to customers with poor

credit, because credit checks were not required for an RTO lease. It would also benefit customers on

tight budgets who could not afford to pay upfront for high-end smartphones.

The RTO model for smartphones would work as follows: Customers could lease a high-end smartphone

such as the Apple iPhone 6 or the Samsung Galaxy S6 (with a retail price of $649) for a monthly fee of

$30 with a minimum term of 12 months. After the minimum term, customers would have three options:

(1) buy the leased phone for $499; (2) continue leasing the phone for $30/month; or (3) return the

leased phone to Best Buy. It was estimated that 25 percent of customers would buy the phone, 25

percent would return the phone, and the remaining 50 percent would keep leasing the phone for an

average of 24 months, after which they would return the phone to Best Buy. Best Buy would sell the

returned used phones in the secondary market at the depreciated price. The new phones would cost

Best Buy an average of $599 to acquire. The depreciated value of the phones that Best Buy could realize

was estimated at $449 at the end of 12 months and $249 at the end of 18 months. Due to the risky

nature of the customers who would be attracted to the RTO arrangement, it was estimated that 20

percent of the phones rented under this arrangement would be lost to defaults. In the case of a default,

Best Buy would need to write off the entire cost of buying the phone. Best Buy estimated that 0.5

million customers would sign up for the RTO model in the first year, 1 million in the second year, and 2

million in the third year. Best Buy would apply an annual discount rate of 12 percent to calculate the net

present value of the cash flows from the RTO model.