“Growth" is a word used in a variety of business-related contexts. Usually, you’ll see growth used as a positive term—but not all types of business growth are necessarily helpful to a retailer’s bottom line. Growth patterns that prioritize short-term gains over long-term success, for example, are neither healthy nor sustainable.
Many new business owners don’t fully understand how to run and grow a profitable retail business. In fact, only 47% of new retail businesses remain in operation following their first four years, according to the Statistic Brain Research Institute. Knowing how to balance new initiatives with a solid operational structure, and internalizing a few key concepts and principles, will allow you to grow your business strategically over time and help it become one of the ones that succeeds.
You might think that to grow your business, you need to make sure it’s always expanding. That’s not necessarily the case. Depending on your business setup and your personal goals, you might want to focus on maintaining your existing model rather than seek explosive growth.
Understanding the principles of profitable growth, no matter your individual situation, is vital to a successful retail business. Otherwise, you’ll eventually start seeing declining returns over time, as the market landscape shifts and costs rise.
Here, we’ll look at how to grow your business in a healthy way. We’ll start with a high-level overview of the building blocks of profitable growth. Once we define what we mean by growth, as well as a couple of other key concepts, we’ll examine some core principles: leveraging automation and scaling, identifying your company’s core value proposition, and effectively balancing operations and projects. We’ll also dive more deeply into these topics later posts in the series.
How to grow your business: What is ‘growth?’
“Business growth” refers to any pattern of consistent increases in business revenue over time. Simply put, any time your numbers are going up, your retail business is technically experiencing growth. This can happen within a short time frame, in response to a special activity or event, like a marketing campaign or public relations push. It also can occur in a more strategic ongoing way.
Strategic growth from a retail perspective primarily occurs by increasing the number of products being sold, increasing market share, or some combination of the two.
Some examples of long-term tactics used to grow a retail business include:
Adding a new product or product line
Offer additional size options for a single product. If you sell face cream, you might add a larger size option for people who want to stock up, or a sample size for customers who want to test the product before purchasing a full-size jar.
Add a new variation to your existing product line. Instead of selling just red shirts, you might start offering blue shirts in the same style.
Create a new product that fits within an existing line. If you sell scented beeswax candles, you could add a new scent option.
Create a new product line to complement an existing one. Start offering quirky pens to go with the quirky notebook you already sell.
Create a completely new product in the same vertical. Start selling casual shoes in addition to formal shoes.
Expand to a new vertical. Start renting out your store space as an event venue in the evenings when the shop is closed.
Increasing market share for existing products
Run a marketing campaign targeting your competitors’ customers, encouraging them to try your brand
Optimize your product to fill a gap your competitors’ products currently don’t
Expand your existing market by reaching into a new demographic
The best way to figure out what option will work best for you is through market and audience research. Look for the preferences or products that fulfill the following criteria:
Your customers want it
It currently doesn’t exist within your industry
It does currently exist in your industry but you can put a unique spin on it
If it fits the above requirements, the final question to ask yourself is whether the idea aligns with your existing brand and do you have the capability and desire to create it. Coming up with ideas that you don’t want to (or even can’t) execute isn’t a very effective approach, and you’ll likely waste a lot of time and energy pursuing that kind of project.
Leveraging automation and scaling to reduce costs and increase production
There’s another important point about growth strategy to understand before you start creating new products or features. Growing revenue and increasing production isn’t helpful if you’re not also finding ways to reduce costs—otherwise, your profits will begin to diminish even as your business is bringing more revenue than ever. If you’re only chasing growth metrics—increased revenue over time—you’re not seeing the full picture.
When you decide to pursue a growth activity, you need to consider how to optimize new product development and production in a way that reduces or neutralizes variable costs while simultaneously increasing output. If you don’t, the addition of new products or an increase in market share can drive up costs to a point of unsustainability, even while you’re adding revenue.
This is the thinking behind wholesale pricing models—offsetting the added costs of materials and labor by buying in bulk and operating the production process at a larger scale as output increases.
When you optimize an existing product in a way that reduces costs and/or increases production, you’re usually engaging in activities related to automation or scaling—core components of a successful, sustainable growth strategy.
Automation can sound daunting and bring to mind images of a robotic workforce. But simple automation is just anything that allows you to lower the cost of decision making. This is important, because any time you have to pause and make a decision, particularly as a senior staff member, it slows down operations and creates delays.
The most common way companies begin automating tasks is by documenting key criteria for simple decisions, often in the form of a checklist or instruction manual, and then either training less-expensive junior staff or contractors or finding a software tool to complete these tasks. Examples include creating customer service rep scripts (with a flowchart for how and when to issue a refund) instead of directing customer complaints to the business owner; subscribing to a software provider that manages email lists and mailouts; or hiring someone to write product descriptions for your website based on a template you provide.
Scaling allows you to increase capacity within a given process while either maintaining or reducing the variable costs of that process. For example, you might scale your sales by hiring additional floor staff for your store. As long as those new employees sell at the same rate at the same base salary, your relative costs would remain stable. Or you might start ordering your materials in bulk at a wholesale cost. As long as your other production costs don’t increase, your overall cost per unit would lower because of the discounted rate.
We’ll go into more detail about automation and scaling, and look at specific examples and tactics for applying these strategies to your business, in a later installment of this series. For now, the important thing to understand is that automation and scaling are essential tools for sustainable growth, letting you increase outputs and reduce costs at the same time. This prevents loss of profit margins, operating at a loss, or increasing waste alongside the increases in revenue and output that come with growth.
How perceived value affects growth strategies
Grow your business, but not at the cost of your perceived value.
When you start looking at growth in terms of reducing costs, another factor emerges: understanding your business’s fundamental value proposition. It’s important to be sure you’re focused on limiting and eliminating unnecessary costs. But if your cost-reduction effort leads to removing something from your product or the production process that contributes to the value a customer sees in your product, then that perceived value will decrease and you could lose that customer’s business altogether. (When we discuss growth strategies, we always view “value” from the point of view of the customer, not the business owner.)
For example, if you sell handmade bags, you might consider using a sewing machine (or even outsourcing production to a manufacturer) to reduce your cost of labor. But if your customers are buying from you specifically because your bags are stitched by hand, you might reduce costs (and improve profit margin) in the short term, but lose money in the long run when your customers decide they’re not getting the same perceived value as before.
On the other hand, if you sell natural body wash, your customers’ perceived value likely will be in the healthy nature of the ingredients, not whether you mixed those ingredients by hand. If you outsourced production to a manufacturer that uses machinery to increase production but still follows the same formula, the value to your customers stays the same but the total cost of production would be reduced and output would be increased—a successful example of scaling.
Understanding your company’s core value is an important part of understanding which growth initiatives to focus on when you consider developing new products and/or going after increased market share. In the next article, we’ll look in more detail at how to identify your business’s value proposition and how to apply that knowledge to your growth strategies.
Is it the right time to grow? Balancing operations with projects
Retail (and in the entrepreneur world in general) places a lot of emphasis on growth for its own sake. But trying to grow your business before you’re ready could leave you with a failing company. You need to know how to recognize the right time to initiate the type of growth activities outlined above versus focusing on building a strong operational foundation for your existing products and business model.
The key is understanding the difference between operations and projects. Operations are what keep everything in your business running smoothly at their current pace—things like payroll, production, and inventory. Projects are the initiatives that contribute to profitable growth, such as new product development.
When you’re thinking about starting a new project, the first thing is to ask yourself is “why.” It’s easy to get distracted launching an exciting new concept instead of putting in the work to make sure your current activities are functioning properly. Or you might feel nervous because your business isn’t bringing in as much revenue as you’d hoped and you think adding a new product will help quickly bring in more cash. Generally, if you’re already feeling cash flow issues, a new project is more likely to drain resources than increase cash flow—at least, in its beginning stages.
Think of your business like the human body: to function properly, it requires energy in the form of food, water, and sleep. When we’re well-rested, we can learn, socialize, and work productively.
This is the physical equivalent of creating more value or, in business terms, growth. But when we feel depleted, we need to focus what energy we have on supporting essential bodily functions—breathing, keeping our heart pumping, etc.—that keep us alive.
When we have a business with a lot of energy (such as people hours and money) flowing through it, it has a strong heartbeat and plenty of resources to take on a new project. But when energy is low, through depleted staff or low cash flow, it’s important to ensure the business’s basic functions get “fed” first. That means focusing on stabilizing core operations before attempting to add additional processes through new projects. You can still do it—just like you can force yourself to get up early after a late night—but if you continue to live that way, eventually your body won’t have enough resources to continue functioning, and it will start to shut down.
So, if you’re wondering whether you’re actively ready to take on a growth project, the first question to ask yourself is, “Are my core operating processes strong and healthy?”
If the answer is yes, it’s a great time to move forward and grow your business, starting with some preliminary research to identify the best opportunities.
How to grow your business: Moving forward with profitable expansion
When growing your retail business, it’s important to scale sustainably rather than expanding for the sake of it. Prioritizing operational stability can help your retail business achieve strategic growth over time.
How has your business grown over time? Have you found it useful to implement tools like automation and scaling to reduce costs and increase outputs? We’d love to hear about your experiences in the comments.
As most retailers know, revenue isn’t simply based on how many items you’ve sold. It’s a more involved calculation of how much each item costs you, the retailer, versus how much the item is sold for.
But the cost of each one of your products is an amalgam of the parts, as well as your overhead and everything in between.
Understanding the cost of goods sold (COGS) not only helps retailers see a full picture of their revenue, but it also brings about some benefits to the business—but more on that later.
Today, let’s focus on the four basic elements of COGS:
What is Cost of Goods Sold?
Why You Need Keep Track of Costs of Goods Sold
What's Included in Cost of Goods Sold?
What You Need to Calculate Cost of Goods Sold
How to Calculate Cost of Goods Sold
1. What is cost of goods sold?
Simply put, COGS is what it the cost of doing business—essentially, the costs to sell each product in your store.
The cost of a product is so much more than just the literal sum of its parts.
Yes, a product requires materials and parts, but it also requires labor. It also requires manufacturing the parts or buying them from third parties. It requires the cost of shipping said parts to your warehouse and assembling these parts. Not to mention the overhead: the human resources from labor, to rent, to equipment, electricity to run the operations, employees to sell said products in your store, as well as sales and marketing and finance and all the other departments.
That’s a lot. And that’s what it costs to sell things.
For example, if you sell a T-shirt, think about the journey that product takes before it even becomes a T-shirt all the way until it gets in the hands of your customer.
Before the T-shirt is even a T-shirt, it is thread. The thread gets turned into fabric and then gets dyed. And manufactured... and the T-shirt is packed nicely for the customer, then shipped. But wait—don’t forget the designers who created the look of the T-shirt. And the people who reviewed and approved it. And the models who tried it on. And the marketers who created the website, and the IT department provided a network for everyone to communicate. And so on.
All for one T-shirt. All of these items cost money to create the T-shirt. So, your T-shirt isn’t simply a T-shirt—it’s the sum of all of these moving parts. As a result, these are all expenses that contribute to the end cost of the product.
Expenses you need to keep track of to ensure not only are you making a profit, but that net versus gross revenue is accurately measured.
Cost to make each T-shirt: $20 Retail price of each T-shirt: $30
2. Why you need to keep track of cost of goods sold
It’s important to keep track of all expenses so you know the company’s gross versus net revenue. But there are many other factors to keep track of COGS as well as other line items.
The biggest of which is the government.
Tis impossible to be sure of anything but Death and Taxes,” from Christopher Bullock, The Cobbler of Preston (1716)
Sure enough, when reporting taxes, Uncle Sam (or your localized government equivalent) wants to know how much a business made so they can tax said business accordingly.
The good news is that COGS are business expenses—which means they don’t count toward your gross revenue. And COGS are an expense line item in your company’s income statement, otherwise known as a profit and loss statement (or P&L). By calculating all business expenses, including COGS, this ensures the company is offsetting them against total revenue come tax season. This means the company will only pay taxes on the net income, thereby decreasing the total amount of taxes owed.
A note on COGS and taxes: while high COGS means lower taxes, that is not the ideal scenario because it ultimately also means lower revenue for the company. It’s important to manage COGS efficiently in order to increase profits.
3. What is included in cost of goods sold
The cost of goods sold is essentially the wholesale price of each item, which includes the direct labor costs required to produce each product.
The individual costs of all parts used to build or assemble the products
The cost of all the raw materials needed for the products
The cost of any and all items purchased for resale and/or to create the product
The parts or machines required to create the product
All supplies required in the production of the product
Shipping parts and equipment to the warehouse to create the product, including containers, freight, fuel surcharges, etc.
The workforce (people) who put the products together, ship the parts, etc.
Warehousing costs, including rent, utilities, etc.
Office staff: everyone directly involved in the product
Software, hardware, office rent, utilities, etc.
4. What you need to calculate cost of goods sold
Typically, the CFO or other certified accounting professional would handle these calculations because it’s not as simple as we’ve laid out in the example above. However, for the DIY CEO, calculating COGS requires a bit of information prep beforehand in order to report accurately.
Here’s what you need to calculate COGS.
Valuation method. Whoever prepares your taxes should advise you on what valuation method you should use for your business: at cost, lower of cost or market, or other.
Beginning inventory. What is the total cost of all your inventory of products at the start of your fiscal year? This should match the ending inventory for the previous fiscal year.
Cost of purchases. [Total of all the products purchased during the fiscal year that is available to sell, including raw materials] LESS [anything taken for personal use]
Cost of labor. The cost of employees directly associated with assembling the product. (Not back-office staff.)
Cost of materials and supplies. Whatever costs are associated with making the products you’re selling.
Other costs. All other costs no previously accounted for: shipping containers, freight for materials and supplies, overhead expenses (rent, utilities, hardware, software, etc.).
Ending inventory. The total value of all remaining items still in inventory at the end of the fiscal year.
The basic formula: [ B + C + D + E + F ] - [ G ] = COGS
5. How to calculate cost of goods sold
Image: The Balance
Direct vs. indirect costs
When working with the numbers, it’s important to remember there are two types of costs associated with each product: direct and indirect costs.
As the names imply, direct costs mean all costs that are directly associated with the product itself. This includes the cost of raw materials or items for resale, cost of inventory of the finished products, the supplies for the production of the products, packaging costs and work in process, the supplies for production, and overhead costs, including utilities and rent.
Whereas indirect costs include labor (the people who put the product together), the equipment used to manufacture the product as well as depreciation costs of the equipment, the costs to store the products, administrative salaries, and non-production equipment for back-office staff.
A note on facilities costs: This part is tricky and requires an experienced accountant to accurately assign each product. These costs need to be divided strategically among all the products being manufactured and warehoused and are usually calculated on an annual basis.
Beginning inventory and cost of purchases
Whether you sell jam, T-shirts, or digital downloads, you'll need to know how much inventory you start the year with to calculate cost of goods sold.
It’s important to keep track of all your inventory at the start and end of each year. Your inventory doesn’t simply include the finished products in stock and ready for resale, but also includes all the raw materials you have, any items that have been started but not completed, and other supplies.
For accounting and reporting purposes, it’s imperative that both your beginning inventory and your ending inventory (from the previous fiscal year) match up exactly—otherwise, a detailed explanation needs to be included.
Further, whatever items and inventory are purchased throughout the year that don’t fall under the beginning or ending inventory must be accounted for as well. These are the cost of purchases and include all items, shipments, manufacturing, etc. As with your personal taxes, you need to keep all paperwork to show these items were purchased during the correct fiscal year.
At the end of the fiscal year, it’s important to take stock (no pun intended) of all the inventory that remains. This means all products that remain and have not been sold. As we’ve discussed, this information will be used in the current COGS calculation, but will also be required for the following year’s calculations as well.
All inventory can be categorized in resale ready, damaged (requires the estimated value of the items damaged), worthless products (evidence of destruction must be provided), and obsolete items (evidence of the devaluation). For the latter, these products can be donated to charities for a little extra goodwill.
Now comes the easy part: The math.
[ Beginning inventory + Cost of purchases + Cost of labor + Cost of materials + Other costs ] - [ Ending inventory ]
These calculations become much easier in spreadsheets or accounting software.
Moving forward with your cost of goods sold formula
As a final thought, remember that you can only include COGS if you’ve sold products. Without sales, you cannot deduct these line items. And it’s important to keep detailed accounting records of all sales and expenses in order to accurately calculate the COGS. This will also help newer businesses evaluate efficiencies and potential cost savings down the road. Remember, the ultimate goal of every business is to be a healthy profit.
Fundraising to start or expand a business can be a scary prospect for retail entrepreneurs—many founders don't know how to connect with potential investors for startup funding or how to close their first fundraising deal.
There are different types of fundraising strategies, including creating a crowdfunding campaign or approaching angel investors or venture capitalists. Here, we’ll focus specifically on tips for connecting with and building relationships with venture capitalists.
Venture capitalists (VCs) are startup funding investors who put money into a business in exchange for equity in that business. Their goal is to get a return on their investment when the business goes public or gets acquired by another company. Venture capitalists only invest in companies that have the potential to prove good returns on their investment.
Venture capitalists not only provide funding, but also can offer expertise and mentorship to help develop a business.
Venture capital funding gives a business immediate credibility and opens other doors to a wide network of potential future investors and partners.
Since the venture capitalist owns a part of the company, the owner is forced to give up a portion part of their business. A VC, depending on the amount of equity granted, may have the right to make or weigh in on big decisions about the retail business.
AVC’s priority is to do what is best for their bottom line. Sometimes that means the goals of a VC firm and of the company it is investing in become misaligned over time.
Launch Pop is a lab that helps high-potential founders launch retail brands within six months and create a strategy to reach their fundraising goals. We turned to Launch Pop’s co-founders, Eva Chan and Jane Lee, for 15 tips on successfully raising startup funding for your retail business.
Things to do before you start fundraising
If you don’t have a track record as an entrepreneur, it doesn’t mean you can’t start connecting with investors during the early stages of building your business. However, it’s a good idea to wait until you have a tangible product and some traction that shows customers are interested in your concept. Update your LinkedIn readily with new press releases or blogs—VCs actively use LinkedIn.
Also try to offer some added value when you ask a venture capitalist to meet: Can you introduce them to a great deal? Can you invite them to a dinner or a social event with founders?
Create your pitch deck
A pitch deck, or funding deck, is a presentation to show to VCs once you're ready to go after funding. Grab their attention by making your pitch deck short, sweet, and to the point.
A pitch deck can include the following information:
The problem you’re looking to solve or the gap in the market you want to fill, accompanied by relevant information or experience. For example, Rebecca Allen started a line of nude pumps because she couldn't find a pair that matched her skin tone.
How your product or services solves that problem or fills that gap.
Your traction so far. Share up to three strong case studies or numbers on engagement, retention, and testimonials. Many VCs are looking to fund startups, so don’t stress if your numbers still aren’t where you want them.
Illustrate the kind of traction your retail brand has gotten with customers thus far, as in the pitch deck example above. Image: Launch Pop
Brief bios of team members who strengthen your product offering.
A breakdown of your five-year plan. This can be a simple table, with columns for five years and rows showing different areas of your business, such as team count, new product offerings, city launches, customer growth, and annual revenue targets.
The amount of money you want to raise, and a breakdown of how you plan to use the funds.
Your founder’s contact email, phone number, and LinkedIn profile.
Don’t put your financials in your deck. Protect your numbers: If the deck is compelling enough, financials can come later during due diligence.
When seeking startup funding, retail brands need to demonstrate a solid plan for not only their products (like in the product roadmap template above) but also how they'll use the investment. Image: Launch Pop
Draft your non-disclosure agreement
A non-disclosure agreement (NDA) is a legal contract that ensures your material, knowledge, and information stay between you and your potential VC. Upon signing an NDA, the VC is agreeing to keep your sensitive data confidential.
Venture firms look at many pitch decks and businesses. The chance that an entrepreneur’s idea isn’t completely original is common. If a VC signs an NDA and later invests in a company that is considered competition, they run the risk of getting sued or in trouble. In some cases, an NDA can limit the VC from accepting pitches from companies in the same market.
One way to work around this and make sure you’re still protecting yourself and your retail business is to share just enough to give a potential investor the information necessary to consider you. Avoid sharing trade secrets, proprietary technology, or deep details about your company’s playbook.
Know your story
VCs invest in people—they want to know you’re passionate, determined, and won’t give up.
Make sure you have a compelling founder story that shows you're ready to put in the hard work and demonstrates your commitment.
Create a list of potential venture capitalists
When formulating a list of target VCs, do your research and find investors who demonstrate an interest in your industry and align with your company profile.
LinkedIn and AngelList are great places to start prospecting. If you know a specific firm you'd like to target, you can search its business page and see who its partners are.
How to connect with potential investors
VCs actively use LinkedIn and are very responsive to messages, especially if you have a robust profile. After you've identified VCs interested in your category, try to connect by sending a personalized message with your invitation.
Create a quick intro
Once you’ve connected on LinkedIn, send a more detailed message within 24 hours, capturing the VC’s attention. Something like: “I would love to tell you more about my company, [Your Company Name], which was recently featured in Forbes [insert link]. I’ve grown our sales revenue from 0K to 150K in 10 months and am ready to scale.”
Be straightforward and share data that your contacts can skim. End your message by saying something like, “If you’re interested in learning more, I’d be happy to send you an email with additional information. What's the best way to reach you?”
When you send a follow-up email, keep the subject line direct, for example, “[Your Company Name] — Raising $.”
You can attach your pitch deck to the email and lead with a quick intro reiterating who you are and what your business is all about. It’s also a good idea to write something like, “Thanks for connecting with me on LinkedIn and providing me with your email address” as a reminder of your initial conversation.
In the body of an email, you can highlight:
Your founders (with links to their LinkedIn profiles)
Your company bio or elevator pitch
One good, recent mention of your business in the press
Your business model: What type of product will you sell, how will you sell it, and how will you make money?
Your track record: What have you accomplished over the past year?
Your vision: Based on your track record, how do you want to grow? Mention short-term and long-term goals—and don’t be afraid to think big. Investors like when founders think about de-risking the company through offering multiple revenue streams that will ultimately grow the business.
Start with warm contacts
Who are you connected to on LinkedIn or through other networks? Who is a second or third-degree connection you can ask to introduce you to a VC you’d like to get in touch with? Referrals are always better than a cold email to a complete stranger.
Approach cold contacts
Cold contacts are investors you have never spoken to and have no common connections with. Message them with a compelling introduction. If you don’t get their attention on LinkedIn, try emailing or calling them directly and ask to be connected. Investment funds are always looking for great companies to invest in, so the response rate can be high if your introduction is solid.
Follow up and follow through
Don’t be afraid to be persistent. If you don’t get a response after you’ve sent your first email, send another one. Use the same email thread, but change the subject line to include the words “Follow Up.” If they don’t respond, try again with a different angle.
Once you’ve made a connection, Chan and Lee recommend finding a way to meet with VCs in person to work on building relationships.
We hosted a private dinner with VCs that cost around $3,000 at a hotel. The experience was memorable, and it helped VCs understand that we’re serious founders who want to make things happen,” says Chan.
You could focus a dinner around a particular topic or theme (ecommerce, for example) and invite other founders you know to contribute and help offset the cost. You can break the ice with a few prompts by asking founders and VCs to introduce themselves and share one or two things about what they’re currently working on and a few less serious details.
“An interesting fact is asking people what their first job was growing up and the first music album they bought,” says Chan.
Closing your startup funding round
Investors experience FOMO
Investors never want to miss out on a hot opportunity. Once you have one VC onboard, others will start wanting a piece of the pie.
Provide VCs with a timeline—“I have goals to fundraise by X date for X reason”—and explain the strategic reasoning for those goals.
Setting a timeline can also help you be more disciplined: Fundraising is a full-time job. For example, if you give yourself a maximum of two months to raise a round of funding, you can work backward to create a game plan for building relationships and finding strategic partners.
Set a goal to meet a certain number of VCs in your category. You might make connections along the way that don’t convert to investor relationships, but networking is key: People talk, and you never know when your name will come up in conversation and with whom.
Don’t drop names
Keep all of your offers confidential. Not sharing the names of current investors with potential investors is a tactic that will create urgency and curiosity.
Instead of dropping names, share the amount investors have committed to date. This can help you ask the right questions when speaking to additional VCs. It can also help you lean into conversations you’re afraid of, like how much money you’re hoping to raise in total and the amount you’ve raised so far. It’s OK to set your raise amount conservatively and receive more interest than expected.
Know what you want and don’t be afraid to ask for it. "We think fundraising is the most significant exercise to test our self-worth," says Chan.
Get it In writing—fast
It’s all talk until it’s written down in a legal document and the money is in the bank. Keep this in mind and sign term sheets—the legal documents that make an investment official—fast.
Term sheets establish what type of and how many shares are given to an investor and how much each share costs. They also outline all the fine details that protect both parties. For example: Does the VC have a board seat? Do they have the right to ask for information on how things are going from a growth perspective and what some of your bottlenecks are?
“The whole premise is to have an exchange of information so help and support can be provided sooner rather than later,” says Chan.
Investors might ask you additional questions for due diligence. This means they want to ensure you’re operating and have built a sturdy structure.
Have your monthly and annual financial statements ready, make sure you’re incorporated, and, if you have a co-founder, make sure your founder agreements are done. VCs will ask for your financials and projections, so be prepared to show investors your revenue projections for the next three to five years, as well as your forecasted operating expenses and a breakdown of your anticipated annual net profit based on these numbers.
A sample income statement to illustrate the financial picture retailers should paint for potential investors. Image: Launch Pop
It’s important to illustrate growth over time, and you need to be able to explain the assumptions made for future years. VCs will want to know how you arrived at your numbers.
Tackle startup funding in rounds
Fundraising can be a full-time job, and it affects your day-to-day operations. You may need to do multiple rounds of fundraising, depending on your needs.
“Urgency comes when the company is about to run out of money or the company reaches another stage of growth that requires more money in order to support the growth,” says Chan.
As your retail business grows, you may need more money to buy inventory, develop marketing campaigns, or open more stores in new cities. Whatever your needs are at the time, do your best to keep the process short and impactful.
Wrapping up: Moving forward with startup funding for your retail business
Now that you have a better handle on the process, you can move forward with seeking startup funding for your own retail enterprise. Just remember: Networking and creating human connections can help you through this process.
Have you successfully raised funding for your retail business? Tell us about it in the comments below.
So, why do these headlines tell such disparate stories?
As many retailers reading right now can likely attest, the sector is shifting in seismic ways. Some brands are going bust while others are blossoming. That’s because, rather than undergoing an apocalypse, the industry is experiencing a renaissance.
The Harvard Business Review points out that retail has reinvented itself multiple times over the last couple of centuries. Railroads and the rise of cities spawned department stores, and later the invention of automobiles led to sprawling shopping malls, pushing the likes of Woolworths and Marshall Field’s into extinction. And a similar shift is happening now.
"Every 50 years or so, retailing undergoes this kind of disruption. Retailers relying on earlier formats either adapt or die out as the new ones pull volume from their stores and make the remaining volume less profitable." —HBR
Luxury retailers and budget brands are seeing encouraging growth while stores in the middle are closing by the dozens. But what’s behind this bifurcation, and which brands are adapting well?
Socioeconomic realities: The dwindling middle class
As we explored in our last issue, modern shoppers are more empowered than ever; technology has put a wealth of product information and data in their immediate grasp. Shoppers are also more discerning—not just because they can be, but because the economic realities of the last decade have forced many consumers to be more conscious about how they spend their disposable dollars.
"The industry is showing weakness in some areas while demonstrating strength in others. This divergence is what we refer to as the great retail bifurcation, and we view the change as highly related to changing consumer economics." —Deloitte Insights
According to data from Deloitte Insights, the last decade was rough on 80% of U.S. consumers. The lower 40% income group struggled to keep up with expenses while the middle 40% saw its income shrink. And while incomes stagnated or decreased, the costs for many necessities now gobble up a bigger portion of the average paycheck. For example, health care costs shot up 62% while food spiked 17%.
As a result, the retail industry is mirroring this shrink in the middle class. With fewer discretionary dollars, the competition between retail brands is fierce and the need to differentiate is stronger than ever.
Amazon eats up vanilla retail brands competing on “convenience”
When attempting to understand the “why” behind this divergence in retail, you can’t discount Amazon’s relentless growth. According to recent data from eMarketer, Amazon was predicted to close 49.1% of all ecommerce sales in 2018 and 5% of all retail sales.
With this growing loss in market share, big-box brands that previously competed on convenience in the mid-priced tier have lost many of their sales to Amazon. Three of these traditional retailers (Sears, Radio Shack, and Payless) accounted for 6,985 of the stores that closed down in 2017.
"...the stores that are swimming in a sea of sameness—mediocre service, over-distributed and uninspiring merchandise, one-size-fits-all marketing, look-alike sales promotions and relentlessly dull store environments—are getting crushed." —Steve Dennis, Retail Consultant and President of SageBerry Consulting
Two roads diverged: Premium versus discount brands
As a consequence of those increasingly tightened budgets and more discerning tastes, consumers are passing over middle-of-the-road retailers that provide mid-tier products and shopping experiences.
Instead, they’re opting for premium retailers peddling quality products and memorable experiences, or budget-conscious brands that offer economical shopping experiences with low prices to match.
As illustrated in the chart below by Deloitte Insights, most of the growth is concentrated at the opposite ends of the spectrum—leaving brands in the middle to adapt or die off.
Image caption: As Deloitte Insights revealed in their now seminal study on “The great retail bifurcation,” both premier and price-based retailers have seen exponential growth compared to their “balanced” retail counterparts.
High-end brands, notably those with equally high-end experiences, saw their revenue grow 81%, or 40-times more than mid-tier retailers. Premium retailers that emphasize memorable in-store experiences are thriving (see Allbirds, AdoreMe, and The Sill, among many others).
"Retailers should be mindful of these industry-wide trends. We see a divergence happening where consumers are choosing very low-priced items or premium items, with less consideration for products that fall in the middle.” —Arpan Podduturi, Shopify’s Director of Product, Retail
Bridging the great divide
As this bifurcation continues to divide brands into two distinct categories, many retailers are staring down two divergent paths: competing on price or offering a premium experience.
While “value” stores serve a strong purpose (who doesn’t love bargain hunting?), high-touch experiences offer retailers a number of benefits. While online shopping is efficient, experience-driven retail’s hands-on, personalized experiences are ideal for shoppers who want something more than “click, cart, checkout.”
While this may not be the right path for every retailer, picking a lane and being deliberate about your strategy can help keep your retail brand out of the barren middle.
This was originally published as the first edition of the retail newsletter. To get industry updates and analysis delivered to your inbox, subscribe today.
Visual search has been around for a few years, but the technology is just starting to come into its own as a tool to help retailers boost their customer experience.
Shopping, with the rise of mobile and multichannel retail, is ripe for new and innovative ways to make it easier for customers to find products they need. That’s why the popularity of visual search has skyrocketed over the past few years, with one of the most popular apps, Pinterest Lens, reporting 100% year-over-year user growth—and accounting for up to 600 million visual searches monthly.
Pinterest Lens, which originally launched in 2017, allows users to search their smartphone camera to snap a pic offline and then find related Pins on the social platform.
Below, we’ll look at what the popularity of visual search means for retailers, and what lessons can be learned from those who are using visual search best.
What is visual search?
Before we get into implementing visual search to drive a better experience for your customers, let’s define visual search.
When customers undertake a visual search, they look for a product with a photo or other image instead of the keywords normally used in search engines. Shoppers can take a picture of something they want to buy, upload it to the visual search engine of their choice—such as Google Images or Pinterest Lens—and immediately see visually similar items available to purchase.
For example, at a 2017 runway show, Tommy Hilfiger introduced an app that allowed attendees to snap photos of items being modeled and upload them to a visual search engine that then presented those same items for sale.
#TOMMYNOW | Snap:Shop App, Digital Partnership with Slyce - YouTube
As fashion site Glossy describes visual search, it’s like Shazam for seamlessly finding “the designer of a jacket worn by a fellow patron at a convenience store or a purse seen on an advertisement on the train.”
Benefits of visual search for retailers
In the retail world, visual search has the power to make the shopping experience that much easier and quicker for customers—and that can yield some serious benefits for retailers and store owners.
Customers who have an easier time finding the products they’re looking for are already one step closer to making a purchase.
Let’s look at some of the other key benefits for retailers who implement a visual search engine.
A shortened path from search to conversion
The key difference between visual search and keyword search is the former makes it easier for customers to take a mental picture and turn it into an actual product available for purchase without having to think about the right keyword phrase or sifting through thousands of almost-there search engine results.
Integrating online and offline shopping experiences
One thing is clear: customers increasingly want multichannel shopping experiences that make it effortless to move from brick-and-mortar store to website to mobile app to anywhere else they want to shop.
Visual search is one of the best ways to integrate the online and offline shopping experiences you offer customers. It makes it easy for them to find a wider variety of products on your website and forges a sense of connection between your online store and your customers’ everyday lives in the physical world.
There’s one big hurdle traditional in-store sellers have to jump: the noise of ecommerce. A simple web search can lead to hundreds of pages of nearly identical products, making for some stiff competition online.
Connecting your customers to a visual search engine ensures you cater the results to the products you have available.
This helps cut through the noise of online shopping and makes it easier for customers to make a purchasing decision. It also ensures they see specifically what you have to offer.
Capitalization of social proof and word of mouth
Social proof and word of mouth are your most effective marketers in today’s retail world, but they’re also tough to track and predict. It’s easy for a gulf to form between the products people see and hear about and your brand.
Word of mouth isn’t worth much if customers can’t figure out where that celebrity’s shoes came from or who made their favorite YouTube star’s go-to mascara. Visual search can help you bridge that gap by providing a direct connection between these favorite products and your brand.
Easy tracking and measuring of success
Visual search performance is something retailers can track and measure easily. If a customer uses visual search and goes on to buy that product (or a similar product), it’s easy to trace that sale back to visual search—even without a custom app or search engine.
Brands can see when shoppers click on visual search results, tell which styles they examined, and, most importantly, when they made a purchase. This means you can identify the specific products and product categories that consistently receive and convert on visual searches, making it easy to double down on efforts that drive results.
By monitoring traffic that comes from visual search engines (like Pinterest and Google) in Google Analytics, you can see how many shoppers click-through to product pages. Google Analytics also shows you conversions—both conversion rates and the dollar amount—so you can see exactly how many sales visual search drives.
How retailers are using visual search to enhance the customer experience
Now that you’re ready to jump into visual search, let’s look at how some major retailers have taken the leap and spearheaded perfect-use cases smaller stores can learn from.
Target dove into visual search headfirst by integrating Pinterest’s visual search tool, Pinterest Lens, into its own mobile app. From inside a Target store, customers can snap a picture of any product and the app will pull up similar items. This makes it easier for customers to browse products they’re actually looking to buy, instead of Target’s entire extensive product catalog. It also allows customers to see a full lineup of options rather than just what’s available in that one store.
Visual search through Pinterest Lens also helps Target capitalize on the social network’s retail goldmine.
“For retailers, Pinterest is an opportunity to engage with customers earlier and more often, well before a transaction takes place,” says Amy Vener, head of Pinterest’s retail vertical strategy.
Using Pinterest Lens means you don’t have to build your own visual search engine, making it easy to test the visual search waters.
By integrating Pinterest’s Save button into your website, you can tap into the platform’s popularity to make your products as easy to find as those of leading brands.
Forever 21’s approach to visual search is all about tapping into the way customers think about products and purchases—which often is more visual than verbal.
“Visual search technology bridges the gap between the convenience of online shopping and the rich discovery experience of traditional retail,” says Alex Ok, Forever 21 president.
To that end, Forever 21 combined visual search and targeted artificial intelligence (AI) to boost its ecommerce shopping experience. The initiative enabled customers to search for attributes (like dress length, shirt neckline, or color) instead of search terms. By combining AI, computer vision, and natural language processing, the retailer is able to offer more relevant, curated search results for shoppers.
Those results lead to higher sales, too. Retail Dive noted that “visual images … are more effective in engaging consumers and converting them into buyers than plain text.” Forever 21’s experience testing their visual search backs that up—with average purchase value jumping 20%.
Audit the shift in experience and customer behavior that happens between your ecommerce and physical retail storefronts, then use visual search to bridge that gap.
Tailor your visual search strategy to the way your customers conceptualize and think about your products.
Neiman Marcus took a similar approach to visual search, offering a tool within its mobile app that allows customers to snap a photo in-store and view similar products in the retailer’s online catalog.
Strong sales from visual searches, which initially was confined to women’s shoes and handbags, led the retailer to roll out the capability for its entire product lineup.
“Visual search removes hurdles, taking the customer directly from inspiration to gratification, says Wanda Gierhart, Neiman Marcus’s chief marketing officer.
You don’t have to dive into visual search headfirst. Take a page from Neiman Marcus’s playbook and test out a visual search tool on a smaller subsection of your product catalog.
The line between online and offline shopping gets blurrier every day. Smart retailers are leading the charge to integrate the two and provide seamless multichannel shopping experiences.
Visual search creates a better customer experience
Leveraging ready-made visual search engines (like Pinterest Lens) means even the smallest retailers can test the visual search waters and learn to bridge the gap between in-person and ecommerce shopping.
Whether your brand is big or small, visual search is an accessible piece of retail technology that holds the potential to help you enhance your customers’ experience—and that’s worth testing out.
When you hear someone mention “customer reviews,” you probably think about the comments and product ratings on ecommerce websites and online stores. But enterprising retail brands increasingly are looking for ways to bring this valuable, user-generated content off the web and into their brick-and-mortar stores.
For example, bookstores have long curated “staff picks” sections as a way to highlight popular products. Many retailers are taking this idea a step further, incorporating customer ratings into their sales pitch in fresh, innovative ways.
The Amazon 4-Star Stores curate top-rated items from customers in a brick-and-mortar context. Image: About Amazon
Take Amazon 4-star stores: an ecommerce retailer of Amazon’s size obviously can’t open a store showcasing even a modest fraction of the products it offers online. To narrow the selection, Amazon takes the best-loved products, based on actual customer reviews and ratings, from its digital realm and offers them in store.
Below, we’ll look at why using customer reviews in-store is beneficial for retailers, who are finding new ways to do it, and how you can leverage ratings and reviews in your own brick-and-mortar store.
Why you should bring customer reviews in-store
In a recent survey by Podium, 93% of respondents said online reviews influence their purchasing decisions. Another survey from Power Reviews found that 70% of shoppers want to see product ratings and reviews while they shop in-store.
Bringing customer reviews in-store, at minimum, eliminates a step for shoppers.
Easily accessible reviews make it easier for customers to both find the information they want and make purchasing decisions.
Plus, when you bring reviews into your store, you take one more step toward melding the convenience of online shopping with the experience of shopping in-store, combining the best of both worlds instead of forcing one to compete against the other.
As mentioned above, Amazon 4-star stores use online customer reviews to inform which products they stock. Every item you see in a physical Amazon shop has a minimum customer rating of four stars and carries a “digital price tag” displaying the average rating and the number of reviews that informed that rating. This can help assure customers of both the quality and popularity of the item.
Rent the Runway, which rents designer dresses and accessories, knows ecommerce limits the extent to which customers can get to know a product. Its physical retail showrooms solve this problem by enabling customers to try on apparel and accessories before renting them. Their showrooms are also unique in that RTR exclusively stocks well-rated and -reviewed items, giving customers an added level of comfort.
Marcopolo’s app shows customers a product’s reviews and other information by scanning QR codes throughout its store. This puts the retailer back in the driver’s seat and helps it convert in-store purchases by encouraging the customer’s existing tendencies to use their smartphones for conducting product research while in-store. Customers are less likely to wind up on a competitor’s website if they can find what they’re looking for quickly.
Tesco, a popular British retailer and grocery store chain, takes an approach similar to Amazon’s in its mobile department, displaying customer reviews alongside its devices. Curating the reviews gives Tesco an extra level of control over the user-generated content customers see and saves customers the step of having to search for reviews. (It also creates a level playing field for those customers without a smartphone who still walk among us.)
Tips for bringing your customer reviews in-store
Now that you’ve seen how retailers are bringing customer reviews into the brick-and-mortar stores, let’s look at how you can do the same.
Above all, don’t be afraid to get creative. Customers are looking for social proof, so any way you can bring that proof into your physical store is worth testing.
Below are a few more tips to help you leverage online ratings and reviews.
Cultivate a robust portfolio of customer reviews online
You have to have customer reviews before you can bring them into the physical retail world. Encouraging customers to leave the right kind of review—ones that help others gather the information they actually want to make a decision—is key.
Curate store inventory based on customer ratings and popularity
If your brand exists in both the ecommerce and brick-and-mortar realms (or if you’re planning to expand into physical retail), customer reviews can be an invaluable signal to help you decide which products to stock in your physical store. Leaning on customer ratings makes it easier to find the products that will yield the best returns in-store, and stocking only products with a certain minimum rating helps customers develop a baseline level of trust in the products they find in your store.
Make customer reviews accessible to your audience
Take a page out of Tesco’s playbook by stopping to consider your audience before you decide how best to leverage customer reviews in store.
Are your customers young tech natives? If so, a QR code that can be scanned with their smartphone will probably work well. If you’re serving a less tech-savvy crowd, you might be better off including customer reviews on in-store displays or even digital signage.
Choose the right reviews to showcase
Just like in the digital world, there’s a fine line between curating the reviews you show to customers and censoring them. The difference can often come down to your intent—is your ultimate goal to inform customers, helping them make the best decision for them?
Also, take the time to consider the usefulness of the reviews you showcase in store. A review that says “Great product!” doesn’t tell customers very much. Look for more in-depth reviews that speak to the features that matter to your shoppers.
Bring online customer reviews into your store
Back in early 2018, we asked several retail experts for their best advice on marketing and growing a retail store. Jason Goldberg, founder of RetailGeek and GVP of commerce strategy at Razorfish, said, “Today's shopper is way savvier than ever before. To cater to these empowered shoppers and to facilitate unplanned purchases, it's critical that retail environments provide access to rich product information and especially provide social proof for in-store purchases.”
Listen to Jason—let your online customer reviews do double the work by using them in store.
For more details on customer reviews and product ratings, read some of these related articles:
Staying on top of inventory management is increasingly important for brands with multiple stores and a multichannel approach to sales.
According to Wasp Barcode, 46% of small businesses either don’t track inventory at all or do so manually. If you’re using inventory management software in your retail business, you’re already on the right path.
Once you’ve implemented the right tools though, it’s up to you to put workflows and automations in place to make your software work proactively for you. One way to do that is with stock alerts.
Below, we’ll look at what stock alerts are, why they’re important, and how you can use them both internally and on the marketing side of your retail business.
What are stock alerts?
Stock alerts, also referred to as inventory alerts, tell you when there has been a significant or noteworthy change in your level of inventory. Many businesses leverage low-stock alerts, but there are other types as well, including alerts for:
Bulk or large orders
Inventory reorder point
Which alerts are best for you will depend on the nature of your product, business, and retail operations.
A lot of inventory management software has a stock alert feature. Typically, a notification is sent to a specific individual, or group of individuals, when an item meets the parameters set for a given alert.
Running out of stock is a very real and costly issue retailers face. Businesses lose $1.75 trillion per year to out-of-stocks, overstocks, and returns. Consider this: Almost a quarter of Amazon’s retail revenue comes from shoppers who attempted to purchase a product in-store, but couldn’t find it in stock. Stock alerts are designed to help retailers avoid this problem.
Inventory alerts are valuable beyond helping keep items in stock. They also reduce a lot of susceptibility to human error and time constraints by automatically keeping you apprised of impactful changes in stock levels.
Optimizing inventory levels helps you become more profitable, use warehouse and storage space more effectively, and reduce holding costs or missed sales.
If you’re managing online and offline channels, multiple store locations, or both, stock alerts can help you ensure every location has enough stock on hand to meet demand.
TRY SHOPIFY POS: Need help tracking stock levels at your warehouse, stores, and online? Try Locations for Shopify POS to seamlessly manage inventory across all your retail operations.
4 ways to use stock alerts in your retail business
Maintain operational control
Stock alerts help your team stay in control logistically. Fewer last-minute orders and more automated systems create seamless retail operations and help your team more effectively manage stock.
Meaghan Brophy, senior retail analyst at FitSmallBusiness.com, recommends using a higher quantity for your low-stock alert.
“If your low-stock alert tells you a product is low when there’s one left, unless you pay for rush shipping on your new order, you may still experience a stockout,” she says.
Brophy also suggests using a higher threshold for your most popular and fastest-selling items, as well as items you frequently run out of. If reordering frequently is too expensive, consider negotiating a better price with your supplier for bulk orders.
“Many suppliers will offer discounts for bigger orders,” says Brophy. “That’s a great opportunity to boost your margins and gain even more profit from your best-selling items.”
Know when to raise or lower prices
A lot of low-stock alerts for particular products can indicate it’s a good time to raise prices. At the same time, a stock alert for aging inventory could mean it’s time to run a promotional discount.
This approach has worked well for Misha Kaura, who owns an eponymous fashion brand and frequently uses pop-up shops to connect with customers in person. Kaura’s customers have a small window of opportunity to buy her products—she only makes 800 of each dress in her ready-to-wear collections and just four in her made-to-measure collections—one reason she has used low-stock alerts since starting her business.
“I’m running a luxury business, and I want to limit overexposure,” Kaura says.
As a result, I actually increase the prices when the stock is low because, at that point, it’s on the verge of being a collector’s item.
Stay organized during busy selling periods
Busy selling periods, whether the winter holidays or another seasonal surge, pose great sales opportunities but also bring logistical challenges. Unpredictable demand, higher volume, and temporary employees who don’t quite know the ins and outs of your business are just a few contributions to the chaos of these times.
These periods come and go quickly, so it’s important to be able to react to the opportunities they provide just as quickly. Stock alerts can help you stay apprised of fluctuations in inventory so you can develop promotions, pricing, and merchandising for slow-moving stock, giving your buying team some breathing room for fast-moving items.
United By Blue implemented low-stock alerts for the first time prior to 2018’s Black Friday Cyber Monday season. As a result, the retailer was able to inform online shoppers of items that were running low, which helped bring customers into United By Blue’s physical store to look for items that were sold out online.
As in the last example, you can leverage stock alerts as a marketing tactic to drive sales, both online and in-store.
Luxury candy brand Sugarfina allows customers visiting its website to sign up and receive in-stock alerts so they can learn when an item’s inventory is replenished and available for purchase.
You can apply this tactic in-store, too. “When there are only a few [items] left, hype them up in store as a ‘Last Chance’ or ‘Almost Sold Out!’ product,” says Brophy. “Shoppers respond to scarcity, especially in-store, where they’re more likely to make an impulse purchase.”
Using stock alerts on Shopify POS
Use back-in-stock alerts to notify customers and help lure back lost sales. Image: Back in Stock
While Shopify POS makes managing inventory across multiple locations easier for retailers, merchants also have access to a wealth of third-party tools to track specific products and automate stock alerts.
To integrate stock alerts and similar automations into your retail operations, check out the following apps in the Shopify App Store:
Low Stock Alert: As the name suggests, this app allows retailers to automate stock management tasks like notifications for low-stock products and daily emails detailing all low-stock items.
StockBot: This bot has a brain for inventory. Retailers can use StockBot to set up customized alerts. Get emails hourly, daily, or weekly with details on low-stock items. And you can track stock levels of specific products, variants, or even entire collections.
Back in Stock: For those tough times when inventory does run out, this app allows customers to sign up for notifications for that particular item. When that product is restocked, the app automatically emails interested customers.
Now Back in Stock: Similar to Back in Stock, this app sends automated notifications to customers about restocked items. But with this specific tool, customers can opt to receive their notification via email, SMS, or push alert.
Moving forward with stock alerts
Stock alerts are a great way to stay on top of inventory and create more profitable marketing and pricing strategies. Automated alerts can keep you and your team on track, and help you to prevent costly stockouts.
In addition to stock alerts, here are more inventory management articles to help retailers manage stock levels:
Setting retail prices for your products is a balancing act. If a retailer prices products too low, it might see a healthy stream of sales without turning any profit (and we all like to eat and pay our bills, right?). But when products are priced too high, a retailer will likely see fewer sales and “price out” more budget-conscious customers.
Ultimately, retail brands have to do their homework. Retailers have to consider factors like production and business costs, revenue goals, and competitor pricing. Even then, setting a retail price isn’t just pure math. In fact, that may be the most straightforward step of the process.
That’s because numbers behave in a logical way. Humans, on the other hand—well, we can be way more complex.
Yes, you need to do the math. But you also need to take a second step that goes beyond hard data and number-crunching.
The art of pricing requires you to also calculate how much human behavior impacts the way we perceive price.
To do so, you’ll need to examine different pricing strategies, their psychological impact on your customers, and make your decision from there.
Retail price: Choosing the right pricing strategy for your brand
Many retailers benchmark their pricing decisions using keystone pricing (explained below), which is essentially doubling the cost of the product to set a healthy profit margin. However, in many instances, you'll want to mark up your products higher or lower, depending on your specific situation.
Here’s an easy formula to help you calculate your retail price:
Retail Price = [(Cost of item) ÷ (100 - markup percentage)] x 100
For example, you want to price a product that costs you $15 at a 45% markup instead of the usual 50%. Here's how you would calculate your retail price:
Retail Price = [(15) ÷ (100 - 45)] x 100
Retail Price = [(15 ÷ 55)] x 100 = $27
While this is a relatively simply markup formula, this pricing strategy doesn’t work for every product in every retail business. Because every retailer is unique, we’ve rounded up 10 common pricing strategies and weighed the advantages and disadvantages of each to make your decision-making simpler.
Manufacturer suggested retail price: What is MSRP?
As the name suggests (no pun intended), the MSRP is the price a manufacturer recommends retailers use when selling a product. Manufacturers first started using MSRPs to help standardize prices of products across multiple locations and retailers.
Retailers often use the MSRP with highly standardized products (i.e., consumer electronics and appliances).
Pros: As a retailer, you can save yourself some time simply by using the MSRP when pricing your products.
Cons: Retailers that use the MSRP aren’t able to compete on price—with MSRPs, most retailers in a given industry will sell that product for the same price.
Keystone pricing: A simple markup formula
This is a pricing strategy that retailers use as an easy rule of thumb. Essentially, it’s when a retailer would simply double the wholesale cost they paid for a product to determine the retail price. Now, there are a number of scenarios in which keystone pricing may be too low, too high, or just right for your business.
If you have products that have a slow turnover, have substantial shipping and handling costs, and are unique or scarce in some sense, then you might be selling yourself short with keystone pricing. In any of these cases, a retailer could likely use a higher markup formula to increase the retail price for these in-demand products.
On the other hand, if your products are highly commoditized and easily available elsewhere, using keystone pricing can be harder to pull off.
Pros: The keystone pricing strategy works as a quick-and-easy rule of thumb that ensures an ample profit margin.
Cons: Depending on the availability and the demand for a particular product, it might be unreasonable for a retailer to markup a product that high.
Multiple pricing: The pros and cons of bundle pricing
We’ve all seen this pricing strategy in grocery stores, but it’s common for apparel as well, especially for socks, underwear, and t-shirts. With the multiple pricing strategy, retailers sell more than one product for a single price, a tactic alternatively known as product bundle pricing.
Pros: Retailers use this strategy to create a higher perceived value for a lower cost—which can ultimately lead to driving larger volume purchases.
Cons: When you bundle products up for a low cost, you'll have trouble trying to sell them individually at a higher cost, creating cognitive dissonance for consumers.
It’s no secret that shoppers love sales, coupons, rebates, seasonal pricing, and other related markdowns. That’s why discounting is the top pricing strategy for retailers across all sectors, used by 97% of survey respondents in a study from Software Advice.
There are several benefits to leaning on discount pricing. The more apparent ones include increasing foot traffic to your store, offloading unsold inventory, and attracting a more price-conscious group of customers.
Pros: The discount pricing strategy is effective for attracting a larger amount of foot traffic to your store and getting rid of out-of-season or old inventory.
Cons: If used too often, it could give you a reputation of being a bargain retailer and could hinder consumers from purchasing your products for regular prices.
For more information on how to build a discount pricing strategy, read these related posts on the topic:
Loss-leading pricing: Increasing the average transaction value
We’ve all done this: We walk into a store lured by the promise of a discount on a hot-ticket product. But instead of walking away with only that product in hand, you ended up purchasing several others as well.
If so, you’ve gotten a taste of the loss-leading pricing strategy. With this strategy, retailers attract customers with a desirable discounted product and then encourage shoppers to buy additional items.
A prime example of this strategy is a grocer that discounts the price on peanut butter and promotes complementary products like loaves of bread, jelly and jam, and honey. The grocer might offer a special bundle price to encourage customers to buy these complementary products together rather than simply selling a single jar of peanut butter.
While the original item might be sold at a loss, the retailer benefits from the other products customers purchase while in-store.
Pros: This tactic can work wonders for retailers. Encouraging shoppers to buy multiple items in a single transaction not only boosts overall sales per customer but can cover any profit loss from cutting the price on the original product.
Cons: Similar to the effect of using discount pricing too often, when you overuse loss-leading prices, customers come to expect bargains and will be hesitant to pay the full retail price.
Psychological pricing: Use charm pricing to sell more with odd numbers
Studies have shown that when merchants spend money, they're experiencing pain or loss. So, it’s up to retailers to help minimize this pain, which can increase the likelihood that customers will make a purchase. Traditionally, merchants have accomplished this with prices ending in an odd number like 5, 7, or 9. For example, a retailer would price a product at $8.99 instead of $9.
In Willian Poundstone’s book Priceless, he picks apart eight studies on the use of charm prices (i.e. those ending in an odd number), and found that they increased sales by 24% on average when compared to their nearby, ’rounded’ price points.
But how do you choose which odd number to use in your pricing strategy? The number 9 reigns supreme when it comes to many retail pricing strategies. Researchers at MIT and the University of Chicago ran an experiment on a standard women's clothing item with the following prices $34, $39, and $44. Guess which one sold the most?
That's right—pricing the item at $39 even outsold its cheaper counterpart price of $34.
Pros: Charm pricing allows retailers to trigger impulse purchasing. Ending prices with an odd number gives shoppers the perception that they’re getting a deal—and that can be tough to resist.
Cons: When you're selling luxury goods, lowering your price from a whole number like $1,000 to $999.99 can actually hurt your brand’s perception. This pricing strategy can give luxury customers the impression that the products are defective or are market down for a similar reason.
Comparative pricing: Beating out the competition
As the name of this pricing strategy suggests, comparative pricing refers to using competitor pricing data as a benchmark and consciously pricing your products below theirs.
Outpricing your competitors can influence price-conscious customers to purchase your products over similar ones. However, this “race to the bottom” from a pricing perspective isn’t always the best strategy for every business and product.
Here’s how we sum up the advantages and drawbacks:
Pros: This strategy can be effective if you can negotiate with your suppliers to obtain a lower cost per unit while cutting costs and actively promoting your special pricing.
Cons: This can be difficult to sustain when you’re a smaller retailer. Lower prices mean lower profit margins, and so you’ll have to sell higher volume than competitors. And, depending on the products you’re selling, customers may not always reach for the lowest-priced item on a shelf.
Going high-end: Above competition pricing
Here, you take the pricing strategy from above and go to the other end of the spectrum. Brands benchmark their competition but consciously price products above theirs and brand themselves as more luxurious, prestigious, or exclusive. For example, this strategy works for Starbucks when people pick them over a lower-priced competitor like Dunkin' Donuts.
A study from economist Richard Thaler looked at people hanging out on a beach wishing for a cold beer to drink. They’re offered two options in this scenario: purchasing a beer at either at a run-down grocery store or a nearby resort hotel. The results found that people were far more willing to pay higher prices at the hotel for the same beer. Sounds crazy, right? Well, that's the power of context and marketing your brand as high-end.
Pros: This pricing strategy can work its “halo effect” on your business and products. Consumers perceive that your products are better quality and more premium due to the higher price compared to competitors.
Cons: This pricing strategy can be difficult to implement, depending on your stores’ physical locations and target customers. If customers are price-sensitive and have several other options to purchase similar products, the strategy won’t be effective. This is why it’s crucial to understand your target customers and do market research.
FURTHER READING: Learn how to conduct market research to take the guesswork out of setting prices, your target customers, and quirks of your chosen niche.
Anchor pricing: Creating a reference point for shoppers
Anchor pricing is another psychological pricing tactic retailers have used to create a favorable comparison. Essentially, a retailer lists both a discounted price and the original price to establish the savings a consumer could gain from making the purchase.
Creating this kind of reference pricing (placing the discounted and original prices side-by-side) triggers what’s known as the anchoring cognitive bias. In an MIT study from Dan Ariely, students were asked to write down the last two digits of their social security number and then consider whether they would pay this amount for items that they didn't know the value of—in the experiment, they used examples like wine, chocolate, and computer equipment.
Next, they were then asked to bid for those items. Dr. Ariely found that students with a higher two-digit number submitted bids that were 60-120% higher than those with lower security numbers. That’s due to the higher price “anchor,” i.e. their social security number. Consumers establish the original price as a reference point in their minds, then “anchor” to it and form their opinion of the listed marked-down price.
The other way you can take advantage of this principle is to intentionally place a higher-priced item next to a cheaper one to draw a customer's attention to it.
Many brands across industries use anchor pricing to influence customers to purchase a mid-tier product. Image: Price Intelligently
To sum up, here are the primary advantages and disadvantages of the anchor pricing strategy:
Pros: If you list your original price as being much higher than the sale price, it can influence a customer to make a purchase based on the perceived deal.
Cons: If your anchor price is unrealistic, it can lead to a breakdown of trust in your brand. Customers can easily price-check products online against your competitors—so ensure your listed prices are reasonable.
How to set wholesale prices for products
Once you have your suggested retail price (SRP), you can move forward with creating a wholesale pricing strategy for your products. This is a necessary process for retail brands that want to delve into business-to-business (B2B) sales.
Retailers will sell their products at a discounted price to another business to resell to their own customers. This can increase a brand’s reach and introduce its products to new audiences.
To set a wholesale pricing strategy, start with the following steps:
Calculate the cost of goods manufactured (COGM): This is the total cost of making or purchasing a product, including materials, labor, and any additional costs necessary to get the goods into inventory and ready to sell, such as shipping and handling.
A product’s COGM can be determined with the following calculation:
Total Material Cost + Total Labor Cost + Additional Costs and Overhead = Cost of Goods Manufactured
Protect your profit margin: Keep in mind that when setting a wholesale pricing strategy, the profit margin should be 50% or more.
Retail margin percentage can be determined with the following formula:
Set your direct-to-consumer and business-to-business prices: That means you’d create an external retail price for your products listed on your website that your direct customers see and a separate wholesale price you share with wholesale or potential wholesale accounts in the form of a line sheet. When you sell wholesale, you're likely selling a higher quantity in each order, which allows you to sell the products at a lower price.
There’s never a black-and-white approach to setting a pricing strategy. Not every pricing strategy will work for every kind of retail business—every brand will need to do their homework and decide what works best for their products and target customers.
Now that you have a deeper understanding of some of the most common pricing strategies for retail businesses, you can make a more informed choice.
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