Profit Hunting: How to use analytic insights to drive profitable growth
Consumers in recent years have shown a seemingly insatiable appetite for special offers and discounts. During the holiday season, retailers generated billions of dollars by rolling-out high-profile promotional strategies – but was this activity actually profitable?
For many retailers, the holiday season lead to significant profit erosion. According to DynamicAction’s Retail Index, 44% of all orders last year were sold on promotion. At the same time, however, retailers saw a 24% reduction in margins.
So how can retailers meet the demand of frugal, promotion driven consumers without taking a hit to the bottom line?
Part of the problem is that many established retail chains do not have a single version of the truth when it comes to measuring their performance. Their individual departments are working in isolation and tracking their own data sets and key performance indicators (KPIs) – and these KPIs only tell part of the story.
Let’s say marketing is reporting on click-throughs on an email campaign to promote a special offer online. E-commerce, meanwhile, is tracking orders relating to this same promotion. Both report excellent results – healthy click-throughs, strong sales – but something clearly isn’t right. Despite revenue growth, the business isn’t making its margins.
Why? All too often, it’s because these legacy KPIs are not linked up to enterprise-level data that shows whether the promotion makes sense for the business as a whole. Furthermore, executives are relying on their “gut feel” for what should be working and don’t want to give up on their tried-and-tested metrics. In turn, they cannot keep up with online-only retailers that have grown up with sophisticated, data-informed decision-making.
Put simply, retailers need a completely new set of KPIs to be competitive in today’s digital retail paradigm.
Running a tighter ship
With the right analytics solution in place, retailers can identify where they are leaking profits and spending money on promotions that aren’t creating value. Through advanced data solutions, this can mean analyzing profitability by individual product.
Rather than relying on cross-product averages, they can see their top-selling products and assess whether a mark-down in price is necessary on a product that is selling in large quantities. Similarly, if they are offering free shipping on all products, they can judge whether doing so is making a difference to the number of units sold. If not, they have found an opportunity to save costs. In this way, data analytics can help them become more precise in their decision-making.
Spotting, and stripping out, the mistakes of the past
Retailers’ promotional strategies are influenced by a wide range of variables and are largely decided by analysts. Mistakes happen. If the business has rolled out a series of promotions, it can be time-consuming to calculate which are proving to be most profitable overall. If a mistake has been made on pricing one product, it can go unnoticed for far too long.
For this reason, we can expect leading retailers to increasingly explore automated systems that can scan for mistakes and inefficiencies across all active promotions. By investing in machine learning and AI, executives can be alerted in good time to initiatives that aren’t profitable.
Agility and acting on the data-driven insight
A good measure of a retailer’s agility is how quickly they can iron out inefficiencies and make positive change to their promotional strategies. Online retailers have the advantage of being able to automatically adjust prices, to keep up with their rivals, but this isn’t possible in physical stores. What chain stores can do, however, is to get better at believing the data and overcoming bureaucracy. Giving their departments the tools to track, measure and recalibrate their strategies more effectively is the first step towards becoming more agile and responding to competition.
In the past, retail has – quite rightly – been thought of as an art as well as a science. But perhaps the balance has tilted a little too far towards the art in recent years. And yet, if retailers want to improve profitability in what is a very tough market, they simply have to have the speed and agility to make, and act on high impact decisions that are supported by analytical insights. It is the only path to a healthy future.