The world's economy is unpredictable, and the possibility of a recession is always around the corner. Factors like rising interest rates, inflation, and higher living costs are causing a slowdown in consumer spending. This challenging situation has retailers feeling the heat to reassess their omnichannel efforts and find out how much value and return on investment they're truly getting. Gone are the days of a revenue-centric mindset; the focus now shifts to profitability. They're learning to "do more with less" in these tough times.
The introduction of omnichannel sales has made the retail landscape more intricate and demanding. Varied cost structures, such as those related to high-quality content and top-notch logistics services, have become essential components of the customer experience. With different pricing structures and margins in play, it's clear that a one-size-fits-all approach for all channels is not always the best solution. A seamless customer experience must be balanced with varying margins across channels. On top of that, new business and logistic models, like marketplaces, concession or drop shipping or are changing the game.
In this straightforward guide, we'll help retailers understand how to analyse profits for products, categories, and brands in this complicated omnichannel world, making it easier to face the challenges of a shaky economy. Please note that this article does not cover the topic of marketing costs and channel attribution. For further reading on determining break-even points and gross margins per single customer, we recommend exploring the concept of unit economics.
Step 1: Understand your channel-specific cost and margin drivers
To successfully navigate the omnichannel landscape, retailers must gain a deep understanding of the costs and margin drivers specific to each channel.
Product content creation costs: The cost of creating product content can vary significantly depending on whether you need to organise your fashion shoot, complete with videos of models, or if you can simply use packshots from your suppliers. Consider whether elaborate product descriptions are necessary, or if importing fact sheets from suppliers will suffice.
Fulfilment costs: Assess the costs associated with each product's fulfilment, taking into account carrier fees, packaging expenses, return rates, and customer shipping fees. Calculate the resulting cost per item in each order, as well as the stock turnover time and associated costs.
Business and logistic model: Analyse the effect of different business models, such as wholesale, concession, drop shipping, or marketplace models, on costs and margins.
Process costs of omnichannel service: Evaluate the costs involved in providing various omnichannel services, such as click & collect, ship from store, and pick from store.
Sold prices and resulting margin: Calculate the actual sold price per item, taking into account markdowns, vouchers, and discounts. From this, determine the resulting margin and identify areas for improvement and optimisation within the omnichannel cost structure.
Step 2: Create the database and do the math
Once you have identified the cost and margin drivers, it's time to work with your data and analytics team to establish a database and perform the necessary calculations. In this section, we will outline the steps to create this database and make sense of the numbers.
Data sources and connections: Identify the data sources required to assess your cost and margin drivers, and establish connections between these sources to facilitate smooth data retrieval.
Calculation frequency: Determine how often you want to perform these calculations. As a starting point, consider doing a manual ad hoc analysis before implementing it as a continuous tool in your business.
Calculation period: Define the period for which you want to calculate costs per sold item. This might be dependent on your sales seasons or other business cycles.
Cost estimation: If it's challenging to determine the cost for each process variant, consider using average costs, lump sums, or calculating handling costs. For example, you might estimate that a click-and-collect order requires 10 minutes of store staff time.
Per unit calculation: Perform the calculation for each sold unit by identifying the logistic variant and related costs and fees for each order, then allocate them to each item in the order. Divide the content cost for a product by the number of items sold in that period.
Data aggregation: After performing the calculations per unit, aggregate the costs and margins for the elements you want to analyse, such as individual products, categories, or brands. With this database in place, you can also calculate the real margin of each order and for each customer.
Step 3: Interpret the findings and take action
With a wealth of data at your fingertips, it's time to interpret the findings and use them to refine your omnichannel category management and marketing strategy. Here are some potential insights and actionable steps you can take based on your analysis:
Marketing and merchandising: Leverage the data to tailor your marketing and merchandising efforts in each channel. Push the most profitable categories and use them as ranking factors in your online categories to drive sales.
Stock allocation: Adjust your stock allocation per channel based on profitability insights. This can help optimise inventory management and maximise returns on investment.
Product bundling and quantity adjustments: If you find that shipping low-priced items individually is unprofitable, consider creating product bundles (e.g., gift baskets) or selling items in higher quantities (e.g., a box of 6 wines) to improve margins.
Supplier negotiations: Use the data on product content creation costs for specific brands to strengthen your position in negotiations with suppliers. If a supplier is unable to provide quality product content, consider charging them for the additional costs incurred.
Delisting or retaining products: If certain categories are highly profitable in-store but not online, you may choose to delist them from the online channel. Alternatively, you could decide to keep them available online for marketing and branding purposes, even if their margins are less favourable.
This data-driven approach empowers retailers to make informed decisions about omnichannel category management, marketing, supplier negotiations and product merchandising. These insights will enable businesses to streamline their operations, enhance customer experience, and maximise profits in an increasingly complex and unpredictable economy.
By embracing a proactive and analytical mindset, retailers can unlock the full potential of their omnichannel initiatives, ensuring their long-term success and resilience in a rapidly evolving industry.
If you want to learn more about this approach or if you want to take action on that, get in touch with Tobias Felbecker.
Dutch retailer HEMA evaluated its future customer experience platform with the Exploded View
Case ･ Kevin Krifter ･ Cristy Gonzalez Morales