Retail Marketing Strategies In A Downturn or Recession

Retail strategies that work in normal times may prove ineffective, or even harmful, for a store during a downturn or recession. In a severe downturn consumer demand is depressed to the point where discounting produces little or no increase in the volume of sales. All that discounting achieves in this situation is destruction of profit margin, which is unsustainable.

Accepting That You Must Make More Profit Margin From Less Sales

This may seem like stating the obvious but it is surprising how many businesses do not adjust when a sustained downturn in sales occurs and continue to order the same type and volume of products in a recession. Invariably this can create a cycle of excess product inventory that requires discounting to clear. This is a downward spiral that risks the future of the business.

Accepting that you are likely to have a lower volume of sales for an extended period of time, and that you need to make more profit from that level of sales, changes your mindset so you can plan your retail strategies that will enhance your store’s ability to survive, and possibly thrive, during the downturn.

Ideas For Increasing Profit From Less Sales

Here are a list of the ideas that can help boost your profits in a recession that we will discuss in more detail below:

• Remove unprofitable sales or products
• Streamline products and services to the minimum attributes that customers need
• Create a high-margin, luxury-level product or package that customers aspire to
• Enhance your processes for gaining word-of-mouth referrals from existing customers
• Increase your high-margin add-on sales
• Add new items your existing customers would normally buy from other suppliers
• Increase your prices and reset the minimum margin you expect on products
• Encourage customers to buy via the channel that costs you the least to serve

Remove unprofitable sales or products

There is an old saying that ‘A dollar saved is a dollar earned’. In retail the reality is that dollar saved is worth multiple dollars of new sales. This is because when you save a dollar you increase your profit by the whole dollar. When you increase sales by a dollar you only increase profit by the fraction of the dollar that is your profit margin after costs.

The key thing to look at is the profitably of the entire process to deliver the sale to each customer, not just the the total value of the actual sale. Some types of unprofitable customers and products to look for are:

• ‘Loss-leader’ or commodity products that you offer at a low margin to attract clients – Analyse whether these products actually generate add-on sales and, if they don’t, consider price rises to acceptable margins or whether it is worth selling these products at all
• High volume purchasers who demand big discounts or are costly to serve – Possibly consider creative ways to offer value in more profitable, non-cash ways or innovate so you lower the cost to serve these customers
• Customers who are habitual returners of products and end up costing you more in customer-service and accounting costs – Don’t sell to them or create policies that recover the costs you spend on them
• Customers who are repeatedly rude to your staff – Consider the recruitment and training costs of replacing a staff member and whether the customer is worth that cost

There will be other types of unprofitable sales in your business but the key point to remember is looking at wholistically at the entire sales and delivery process to increase the profitability of the entire value chain.

Unbundle products and services to offer a more-profitable, affordable offering

When customers evaluate products they consider both ‘determinant attributes’, or attributes they must have before they will purchase, and ‘important attributes’, or attributes they like to have. To use airlines as an example safety is a determinant attribute that must be present whereas receiving a free meal on the flight might be important but something they may be willing to go without to receive a cheaper flight.

The key to this step is knowing your customer well. You need to make the right decision on what parts of your product or service offering you can alter to be able to offer the customer a lower price. You either stop offering things you used to include for free, or you unbundle products or services you used to offer into a more minimalist core product with the extras becoming add-ons that can be purchased. An example of this would a phone manufacturer no longer including a charger with every phone purchased because most customers already own multiple chargers.

Your frontline staff are vital to implementing this. Firstly, their knowledge of the customer is vital to know what you can remove and change. Additionally, they are the ones that will face any complaints from staff over changes and you must equip them with the training and support to explain the changes to customers.

Overall if you do this correctly you can help customers save money by only paying for what they actually use and you can increase your profit margins to acceptable levels.

Create a high-margin, luxury-level product or package that customers aspire to

This may seem counter-intuitive but research suggests that during recessions many customers will sacrifice many of the staples in their life and save up for a premium service or product that makes them feel like they are treating themselves. In fact, the sales of luxury items can rise during a recession while sales of cheap products can fall.

The other benefit of this strategy is that by implementing a very high priced item it makes the price of your normal products look cheap. This has also been shown in research to be an effective retail sales strategy by giving customers a way to perceive the value of the products.

The key to offering this type of product is knowing what customers aspire to and value. You also need to ensure you make a higher profit margin from this offering to counter-balance any reduction in sales volume. If it works you will either earn higher value from less work, or you will make it easier to convert sales of your existing products by pitching them as a great value option compared to the premium option.

Enhance your processes for gaining word-of-mouth referrals from existing customers

Recent research by Bain Consulting has confirmed that the customer referrals bring in new customers that will be significantly more valuable over time than customers attracted by other marketing channels. One of the key finding was that ‘across a range of industries from fashion to food, health and beauty, financial services, travel, and 70% of all new-customer profits.‘

Learning which of your customers are your best referrers is the first step. One of the best mechanisms for this is to add shareable links to the products and services page on your website. If this is set up correctly when the referrer shares the link it will contain a unique ‘UTM’ tracking code that will let you identify who the link was shared by. The added benefit of shareable links is higher levels of conversions of referrals to new customers.

A good strategy for encouraging clients to refer is to offer both them and the person they refer some form of reward. The person referring will feel better about accepting a reward if they can justify to themselves that their friend also receives something. The key to making this work is that the reward should not be large enough that the customer refers for personal gain rather than their satisfaction with your business. A good first step for preventing this is to limit the reward system to customers who have a true history of loyalty to your brand.

Increase your high-margin add-on sales

“Would you like fries with that?” You have most likely heard this type of question when making a purchase many times in your life. Add-on sales remain one of the most effective strategies because it increases your profit per sale with minimal extra cost. If done correctly it can actually make the customer’s experience better as they walk away with everything they need.

To make this work your staff need to well-trained, they have to a range of add-ons available to sell, and they have to know what add-ons customers will actually value. One of the most important points to train in your staff is they they don’t necessarily need to leave the selling of the add-on until the customer is paying for the product. Dropping hints throughout the sales process helps to prime customers to understand the value of the extra item and be ready to accept it.

By making extra add-on sales you gain a greater share of the customer’s wallet, which can dramatically enhance profit over time.

Add new items your existing customers would normally buy from other suppliers

As mentioned earlier, increasing your share of the customer’s wallet is a great strategy for increasing profits. Compared to the marketing expense of attracting a new customer increasing the sales to an existing product is far more likely to increase your profit.

This requires knowledge of your customer and some thought as to what items will fit with your brand in a credible way. It might involve partnering with another business to deliver their services to your customer base. The main thing to ensure is that when you are adding these items to your business that will deliver extra profit to you.

Increase your prices and reset the minimum margin you expect on products

In a similar way to the effect that saving a dollar of costs has on your profit, adding a dollar to your price delivers a full dollar of profit increase to business. However, many businesses price their products based on a fixed margin over the cost of the products. Additionally, many businesses are scared to raise prices for fear of losing clients.

In times of high inflation it is important to remember that customers often expect prices to rise. They might not like it, and they may grumble about it, but ultimately they will still buy. Secondly, when you increase your profit margin you can afford to lose a substantial number of clients before it reduces your profit.

Take a test and measure strategy to this approach. Work on the strategy of ‘charge what the market will bear’, raise your prices and then measure the effect on profit not sales. You objective is not to maximise sales but to optimise the level of pricing and sales to maximise your profit.

Encourage customers to buy via the channel that costs you the least to serve

E-commerce has attracted a substantial amount of attention and, in many cases, an online presence is a must have in this day and age. However, the delivery and returns costs that come with online sales can mean that sales via this channel are less profitable. In comparison, bricks and mortar sales remove the need for delivery costs, reduce the chance of returns because customers have seen the products in person and it increases your chances of add-on sales.

Analyse your various sales channels and work out the ones that deliver the most profit to your business. Then consider rewarding customers to incentivise them to use the channels that are the best for you. You might increase the costs of serving that channel slightly but the overall improvement in profitability may be worth it.

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