Increase Your Revenue to Profit Ratio

Retail margins are in jeopardy. Between mobile shopping, online retail, and the popularity of social media coupled with a decade of flat sector profitability, retailers must change how they fundamentally operate or join the ever-growing graveyard of bygone brands. Even a stalwart brand like Sears has failed to make this transition and has announced its likely demise.

However, there is a brighter future for retailers who combine smart, focused business strategies, cost controls, as well as data and AI technologies. From Michael Kors to Home Depot, smart retailers are combining data technologies, artificial intelligence, and search to drive better decisions, improve margins, and increase sales.

How can you perform like a leader?

“Being agile enough to compete isn’t a one-time exercise that happens by just cutting costs. Success comes from reinvesting those savings in activities that will drive competitive advantage”

Cut Costs But Don’t Stop There

According to Accenture, “being agile enough to compete isn’t a one-time exercise that happens by just cutting costs. Success comes from reinvesting those savings in activities that will drive competitive advantage and revenue growth, such as creating a more efficient operating model, embedding enterprise wide process excellence or building leading edge capabilities.”

Top performing retailers don’t cost-cut their way to profitability. Failing retailers like Sears/Kmart have tried that for years. Cutting your way into profitability is rare and if you get there you’re never a leader. Once a company is profitable, the right cuts can propel it into a leadership position.

Making the right cuts means taking a holistic view of the organization and the customer experience. It means looking at the retail outlet, distribution center, and opportunities for automation from factory to point of sale

Master Dynamic Pricing and Price Testing

Matching competitors’ prices seems intuitive, especially online, but isn’t always the wisest approach. Formulating the right pricing strategy is difficult. Setting the right price requires recording and understanding consumer signals and broad experimentation. These days dynamic pricing strategies often must be done per SKU and in some cases per customer.

According to McKinsey, retailers should consider dynamic pricing strategies and “conduct a pilot in a handful of categories for concept design and testing. Done right, the pilot—and the subsequent rollout of dynamic pricing across all product categories—will yield meaningful improvements in revenue, profit, and customer price perception.”

Key to any pricing strategy is testing whether it works and if it influences customer buying decisions positively or negatively. Ethically, per-customer pricing should be done very carefully to avoid including any kind of demography that might be linked to race, gender, or other sensitive parameters. Pricing should be based more strictly on customer behavior signals similar to how Orbitz and other sites have implemented it.

Price testing should be implemented in combination with search A-B testing. Sometimes boosting more expensive (or lower cost) brands will also yield stronger results. As in software and hardware development, the strongest results will be the retailers who run the best tests.

“Retailers who deploy a bunch of next generation social shopping are often times making up for poor competitiveness in other areas and have seen a 17% decrease in sales and a 36% decrease in share price.” – Accenture

Avoiding Digital Window Dressing

According to Accenture, digital window dressing is “any digital capability that is a ‘nice to have’ but does not make up for a lack of competitiveness in core areas such as price, assortment, customer service, etc.” Retailers who cut costs and move to digital marketplaces because competitors are doing it tend to underperform.

Brands are selling wares on sites like Facebook and Pinterest (or selling through them) in greater numbers. But retailers who deploy a bunch of these next-generation social shopping tactics are often making up for poor competitiveness in other areas and have seen a 17% decrease in sales and a 36% decrease in share price.

“Industry frontrunners are competitive because of differentiators enabled by digital investments that span their business, from competitive pricing and hassle-free delivery to broad selection and shopping made simple.” – Accenture

The right digital investments and partnerships can increase sales and profitability. For omnichannel retailers, those investments should focus on enhancing the in-store experience and connecting with consumer signal data that includes the online and mobile experience as well.

According to Accenture, “industry frontrunners are competitive because of differentiators enabled by digital investments that span their business, from competitive pricing and hassle-free delivery to broad selection and shopping made simple.” In other words, the investment shouldn’t end with customer experience. Back office logistics are critical and the retailers that use AI and other technologies to drive operational efficiency while eliminating silos will become more competitive.

“When it comes to profitability, an online sale is not an equivalent replacement for that same item purchased in store.”

Rethink Your Omnichannel and Distribution Strategies

According to the retail consulting firm AlixPartners, “when it comes to profitability, an online sale is not an equivalent replacement for that same item purchased in store.” Some retailers have an idea that online sales are automatically cheaper or that order online and pickup in the store is the lowest cost option to the retailer. By some models this may not prove true when all of the costs are added up.

Research has shown that online customers spend less on average than in-store customers and that distance from the store is the main factor on whether someone shops online. Encouraging online shoppers to come into the store increases profits. Encouraging in-store shoppers to go online decreases profits.

The best omnichannel strategy focuses on making sure customers have a seamless, personalized experience and gives them a reason to come into the store if possible. This means, among other things, providing excellent search and recommendations. The best omnichannel strategy also takes into account the supply chain as well as other costs while measuring profitability all along the way.

AI Helps Industry Leaders to Specialize and Focus

Some of the more general department stores that never made the full omnichannel transition, like KMart/Sears and JC Penney are failing while retailers that focus on one section of the market or on one general area are profiting. Look at success stories like Home Depot, TJ Maxx/Marshalls, and Best Buy. They each specialize in a specific market segment allowing them to cater to and delight their customers.

It is no accident that specialization allows for better AI recommendations and customer targeting. Specialization also gives brands greater control over supply chains, inventory, and merchandising. This focus tightens up everything from cost to how items are displayed, searched, and recommended.

Your best customers are the ones that come to your store or your site first and only go elsewhere if you can’t help them. It is in a retailer’s best interest to be everything they want you to be.

‘Signals’ Help You Focus on Your Best Customers

Especially with online retail, specializing and focusing means thinking about not all of your customers but your “best” customers. Customers who drop-in once to take advantage of a low price aren’t your best customers. Your best customers are the ones that come to your store or your site first and only go elsewhere if you can’t help them. It is in a retailer’s best interest to be everything they want you to be.

Know these customers. There are tools and technologies that allow you to capture customer signals to better understand their behavior. Signals are customer behavior data that help you recognize and focus on these customers and recommend things to them in the store, and across mobile, web, and other channels. These signals can even tell you when these customers are not as satisfied as they have been in the past so you can develop a plan to incentivize them to come back.

Leaders Do Everything Necessary

One trick of the trade isn’t enough to lead the industry in profitability. It is a combination of focus, rethinking and cutting costs, and deploying smart technology that allows you to cater to your best customers and delight them. By combining a set of strategies and the appropriate well thought out technologies, leading retailers can profit even in uncertain times.

Next Steps

• Read Increase Retail Sales with Recommendations
• Watch AI and Machine Learning for Omnichannel Retailers webinar
• Contact us, we’d love to help!