Exploration vs. Exploitation: What’s the Right Balance for a Retailer?

Exploration vs exploitation

 The success of any complex system, from a beehive to an ant colony to a retail business, depends on the balance between exploiting known resources and the exploration of new ones. Spend all your time eating food that you already have, and when you get hungry, you’ll starve. But spend too much time looking for new sources of food, and you are wasting energy you don’t need to waste.

Scientists have shown that bees will find any new source of food within about two kilometres of their hive, regardless of the nectar resources they already have available. When a bee finds a good source of nectar, it returns to the hive to tell the other bees how far away the nectar is, its direction from the hive (relative to the sun), and the quantity of nectar it finds. All this is done by a bee ‘dancing’ in front of other bees:

All biological systems must balance the time and effort spent on exploitation with the time and effort spent on exploration. Almost any complex adaptative system must correctly achieve this balance to be able to last, that is, to survive by adapting to one change to another in their environment.

For example, consider how most companies record and report their profits. When a company leverages its known sources of income, it lives in the short term, but long-term success must also be explored. The biggest problem currently affecting most companies is short-termism. Corporate organisation and executive rewards tend to focus on exploitation rather than exploration, so companies choose short-term benefits at the expense of long-term shareholder value.

All types of organisations (and not just companies) tend to be more durable when they are open to new information and can adapt to new ideas while coming together through a common purpose or set of fixed beliefs. That’s why an objective-based company is likely to have a more extended and more profitable business than a nonpurpose company: — because it is a “sense of purpose” of the unity of nature, which makes it easier for a company to adapt to new ideas on how to achieve this purpose.

Therefore, the balance between exploration and exploration can also be seen as a metaphor for the balance between innovation and lean management. Innovation requires creativity and new thinking, exploring the world and looking for more possibilities. Running an efficient business, on the other hand, requires attention to detail, error prevention and cost control. So it’s easy to see why innovation can conflict with running a lean operation, if for no other reason, the more mistakes you avoid, the less innovation you’ll find by happy accident.

And in the world of marketing, increasingly useful methods of choosing the right tactics or strategies called “multi-armed bandit problem”, a statistical task that involves figuring out which actions can produce the highest return over time. Think of a player in a casino player who can choose to play many different slot machines (also known as “single-arm bandits”). Each machine has its chances of return that players do not know. How should players decide which machine to play?

The more you play, the more you understand each machine’s return chances. Still, instead of simply betting on past winning machines (pure exploitation strategy), your long-term success depends on investing some money to play new machines, finding those that can pay even higher return rates.

Statistically, the multi-armed bandit problem is precisely the problem that retailers face when evaluating different offers for different shoppers within a range of possibilities. Solving these problems requires machine learning solutions such as Learning-To-Rank personalisation that understands what each shopper likes, ranks content for each shopper and learns from their reaction to that content.

Exploration and exploitation are both essential to the survival of a retail business. Still, they only work well when used together, despite any friction or conflict that may be produced as a result.

Therefore, in addition to being increasingly important as a matter of marketing personalisation, achieving the right balance between exploration and exploitation can be the most important strategic task any retail management team can undertake.

Emily Dawson

Emily Dawson

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