Guest Column | July 12, 2021

Minimizing Lost Profits: 7 Emergency Steps For Every Retailer To Follow

By Vladimir Kuchkanov, Competera

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Lost profit is a perennial, complex issue that always has been giving retailers headaches. Despite its longevity, the ever-increasing reasons for profits drain remain little investigated. Some lost profit cases may result from one's inconsistent pricing strategy; some of them take roots from poor customer experience and lost sales; others may be the result of unjustified discounts. The list might get impressively long here.

Though it's fair to say that the responsibility for lost profits does not always lie on retailers' shoulders. Here, one can hardly overestimate the socio-economic factor's role. For example, the recent pandemic got buyers "financially-squeezed" and has scaled retailers' lost profits making the gap dramatically notable. 

Today, as the world is steadily recovering (in a particularly new, revised reality), the lingering challenges still loom above retailers. Regaining lost profit after a year of missed opportunities rightly tops the bucket list of the industry players even though the actual scale of the lost yield is known to little if any of them. 

So, where should retailers start from in pursuit of winning their lost profits back? However obvious it may sound, before diving deep into crafting strategic roadmaps, one should assess the size of the gap. Depending on the industry, average shelf price, promo, and competitors' reaction to any price tweaks, the difference in lost profits may vary in hundreds of thousands of dollars and thus raise different levels of urgency for the retailer to respond.

When the lost profit is estimated, here are the 7 emergency steps to take and bootstrap the recovery:

1. Increase the share of exclusive range. Exclusive range provides a solid competitive edge and an excellent opportunity to review prices regularly without hurting sales and revenue. Besides the one-of-a-kind value proposition that drags more customers in, these unique SKUs provide the best margin available to the seller only. May the products of this role be average or low to generate revenue and sales, they are strong margin generators.

2. Improve customer experience. 62% of customers are willing to pay more for good customer service - the fact that should help retailers set their priorities up for 2021. As Kizer & Bender well put it, the physical retail store is more important than ever because consumers still crave an in-person experience. They expect stores to be well-merchandised with curated assortments and sales floors that are easy and fun to shop.

As to online retailers, for starters, they should make sure their websites are easy to surf through on all possible devices, the assortment availability is timely updated, and customers can pay for their orders using various payment systems. There are plenty of options for creating unique customer experiences with a positive financial output for the business. It's time to get creative!

3. Justify your discounts. Who doesn't love a good bargain? In a room full of people, there would hardly be anyone. Regardless of the deal's size, discounts are great attraction-grabbers and sales generators. But while it's all fun and joy for buyers, retailers should be on the lookout and take discounts regarding the changes in consumer demand and market trends, internal pricing structure, inventory availability, and past transactional data. Otherwise, discount for the sake of a discount or, even worse, participation in promo wars is the opposite path to lost profit recovery.

4. Segment assortment wisely. Product segmentation is king when it comes to defining the goods that can unlock strong revenue streams. By establishing the KVIs, revenue-generators, long-tail products, etc., retailers get a distinct view of the portfolio and hence can craft their pricing strategies accordingly, e.g., market-driven repricing for KVIs, elasticity-based pricing for revenue-generators, and long-tail assortment.

5. Mind price elasticities. Demand elasticity with regard to prices is the golden thread that interweaves products in retailers' portfolios. In practice, some slightest price changes of a product may lead to a significant increase in demand for elastic or no changes in interest for inelastic products. Nonetheless, retailers keep making the same mistake: they raise prices for highly elastic products and reduce them for inelastic ones. Just imagine the crippling effects of such a lapse: a 1% price increase for an elastic product can lead to a 3% decrease in demand. Another example: a price decrease for an inelastic product can lead to decreased revenue and margin, and a negative impact on the whole category.

6. Do not copycat competitors' price moves. Keeping an eye out on the market and direct competitors is a great practice, but blind following peers' price moves would not distinguish you from the crowd. Instead of copying price increases on the market, practicing price lagging (i.e., maintaining a pause after competitors increase prices to lure new customers in and gradually raising prices for an eventual gain) could be a winning strategy in the long run.

7. Keep shelf prices healthy. Shelf prices are retailers' touchpoints with customers. Knowing that most buying decisions are made in front of product shelves, retailers need to make sure the price tags reflect actual prices which are neither bloated nor understated.

Summing Up

Just as before the pandemics, retailers scratch heads over the long-existing challenges of boosting revenue and winning the lost profits back. While lost profit remains a complex issue weighed down with the socio-economic factor, the first step implies its thorough assessment and crafting a strategy-driven action plan. The practices mentioned above can be an excellent start for your lost profit recovery in 2021!