How to Grow Your Business in a Consumer Choice Economy

Introduction

When it comes to shopping, today’s consumers have more power than ever before. They’re shaping retail buying experiences with their increasing desire to buy anything, from anywhere, at anytime. They expect seamless, omnichannel experiences, simple payment options, fast delivery, and easy returns.

These increased demands make up the new retail reality, and it leaves room for brands to either struggle or soar. Some brands will let this environment be a barrier to growth while others will leverage it as an opportunity. The brands who refuse to adapt will fail and the brands that focus on implementing processes and strategies to meet these evolving customer demands will succeed.

When we think about making customers happy, we often think about how they engage directly with our brands. Curating relevant social media content, hiring excellent customer service representatives, and listening to customer feedback on products are all things we think about when we strategize around customer satisfaction.

But what about getting the right item, to the right person, at the right time? The orchestration that goes into successfully fulfilling orders is no small feat. In today’s consumer choice economy, how you manage your inventory and operations is the key to customer loyalty.

This guide will walk you through key pieces of the retail life cycle—planning, sales, and order fulfillment—and discuss ways to optimize and scale the backend of your business for customer happiness.

Planning

Inventory planning is the very beginning of the cycle that ensures customers get what they want, when they want it. It is a complicated process that even large brands struggle with. Last year, when Macy’s closed 15 percent of stores, their CEO said, “…there was higher inventory than planned and sales didn’t materialize.”

The good news for small and mid-sized brands and retailers, however, is there is more room for agility and to create processes from the start that prevent this type of disastrous outcome. In order to do this effectively, it’s important to understand both the science and the art of inventory planning.

Inventory planning is both steeped in analytics and data and dependent upon unpredictable macro and micro economic trends and ever-changing shopping behaviors or patterns. In order to increase profits with accurate forecasting and planning, it’s imperative to understand—and master—both aspects of the function.

Much of an inventory planner’s job involves sourcing, normalizing, and analyzing data. An effective planner must know what data is needed, where to find it, and how to manipulate it to tell a story and reveal trends.

The contextual side of planning ranges from the micro—knowing your brand’s customers—to the macro: your brand’s competitive landscape as well as how current events might affect the market or demand for your products. Understanding trend indicators is also critical to inventory planning. Someone whose job is focused on this aspect of the product supply chain is often responsible for proposing discounts or promotions, which are based on some combination of data, gut instinct, and financial metrics and account for when something must be moved off the shelves.

The Challenges–And How to Overcome Them

Disparate Data

Before an inventory planner can begin to build out a forecast, (s)he needs to gather and analyze historical data. This presents a huge challenge for many companies as this historical data can be siloed, inaccurate, and often lives within disparate systems. Without easy access to things like accurate historical inventory levels and sales data, a huge amount of time is wasted simply pulling these statistics and organizing them into one place; and from there, the planner must validate and normalize it in order to even get started.

With inventory in multiple places and businesses using different systems for things like logistics, fulfillment, accounting, point of sale, etc., it’s easy to make uninformed decisions based on disparate data. Without accurate data, a business is more likely to suffer from stock issues, and it’s difficult both to quantify missed opportunity from out-of-stocks as well as the cost of overstocking. With a potential margin drain of overstocks, you eventually must discount products to get them off the shelves. It’s both an art and a science to understand how to move through inventory without liquidating it; especially because most retailers do not want to be known as a discounter.

In order to build as accurate a plan as possible, consolidate data from your various systems into one centralized location. With all your data in one place, it becomes easier to make informed, strategic plans based on real-time, accurate information.

Making Predictions

In addition to the analytics involved in effective inventory planning, there are some aspects that involve more intuitive guesswork, even for large retailers with endless budget for software and headcount. There is no magical equation for even the most experienced inventory planner to predict optimal inventory investments 6-12 months in advance. Size-level planning is another component of planning that involves making informed predictions. The issue is exacerbated by out-of-stock situations as it’s impossible to have a complete picture of how a certain size would sell if it it’s unavailable. Since planners work cross-departmentally, it’s important to know as quickly as possible—especially during a peak sales season—if adjustments must be made to a forecast. How items are trending and when and if to discount products is a combination of informed guesswork and data analysis and must be coordinated across operations, finance, merchandising, and marketing departments.

While historical data won’t allow you to create a foolproof plan, it’s the best way to ensure your predictions aren’t entirely intuition-based. An experienced planner with a solid foundational understanding of the industry and, eventually, the company, is critical to interpreting this data in a meaningful way.

Determining Promotional Depth

Determining the right discount amount is challenging for most retailers because price elasticity information is not readily available. For example, if you sell something at 20 percent off, would the customer have purchased that same item for only 15 percent off? Large retailers often have price optimization software to analyze price elasticity, but unless you have a robust history of changing price points in similar pricing tiers, it’s almost impossible to predict how a customer buys at different discounts. As a result, retailers often rely on industry traditions (30-50-70 markdown cadences) or the competitive landscape to determine promotion and markdown prices, which can lead to stagnant sales or inventory wipeouts.  

Discounting can also create systems issues and challenges when analyzing data. Many pricing systems are not user friendly and as an inventory planner there is always the fear that you will accidentally take an item to 90 percent off. This is a dramatic example but even more benign systems issues can cause headaches for store associates, customer service, and customers, often requiring manual hotfixes.  

Think strategically about promotions and markdowns. A promotional price is a great way to move additional units in an over-inventoried, but otherwise well-performing style, or to entice a customer to buy when (s)he otherwise would not. A markdown price is a great way to clear through seasonal inventory and to manage items out of your system. It is important to remember that while everyone dreams of selling items at full price, promotions or markdowns can often generate profitable sales.

Managing In-Season Business

We’ve discussed the inherent uncertainty and unpredictability involved in inventory planning. Sales performance can fluctuate if traffic to the site is lower than predicted. An unseasonably warm winter can impact the turn of your outerwear business and consequently cause a backup of inventory. Your markdown product could cannibalize sales from your full price items and erode margin metrics. Since pre-season plans and strategies are built upon “informed guesswork”, it is important to develop contingency plans, in-season, when real time performance diverges from predicted results. This can be challenging; planners must assess and diagnose the business, act quickly to determine action steps, and finally execute and track these in-season changes in conjunction with their cross functional team. The key here is rapid and thoughtful decision making, which requires meaningful analysis of data and experience.

Consistently reading the business and maintaining communication and alignment with key business partners are smart ways to address in-season needs and opportunities. It is important to maintaining flexibility and utilize creative problem solving when determining action plans to mitigate in-season risks.

While inventory planning may seem daunting, it doesn’t need to be. With the right person and the right tools, it’s much easier to make informed, data-driven inventory plans. With a strong planning process in place, it becomes much easier to make sure inventory is where it needs to be, when it needs to be there, in order to keep your customers happy.

Optimizing Your Sales Channels for Customer Satisfaction

Once you’ve created a great product, the next step is figuring out the sales channels that will allow you to maximize profit—and customer satisfaction. In today’s retail landscape, many brands will start out with an eCommerce site hosted on a platform like Shopify or Magento. Many, also, will pair this with a solution like Amazon, although some brands are hesitant because it can reduce the brand’s autonomy over both product and process.

In addition, for many vertically integrated retailers, adding a wholesale channel can complement direct-to-consumer sales through increased brand awareness, new customer acquisition, and incremental revenues. Many traditionally direct to consumer brands are exploring wholesale as another way to be where their customer is and best serve them.

However, before jumping into wholesale as a means of reaching your customer when and how (s)he wants to be reached, you must determine whether or not wholesale is appropriate, and if so, how to properly design your wholesale model.

Is Wholesale Right for Me?

In determining if wholesale is an appropriate channel for your business, you should explore two key issues. First, you need to understand the pros and cons of wholesale and whether the benefits outweigh the costs. Second, you must determine if your business is properly equipped to handle a wholesale channel.

Benefits & Risks

Wholesaling can provide retailers with enormous benefits, like raising brand awareness and finding new customers. For regional retailers, adding a wholesale channel can expand your geographical footprint without the large upfront investment in retail locations. Retail partners can also help with brand positioning and reaching new customer demographics. For example, J. Crew partnered with Nordstrom to increase exposure among upscale consumers.

There are, however, risks associated with wholesaling that retailers must consider before entering the channel. The biggest is forfeiting direct interaction with the end customer, as your retail partners will own the customer experience and relationship (not to mention the data).

You also relinquish some control over how your products are priced and merchandised. Finally, you are facilitating more direct competition with similar brands and products. For example, if a client comes into your retail store to purchase a dress, the customer can only choose among your selection. If she looks for your dresses at one of your retail partners, she can also shop dresses from competitors.

Given our goal of competing in a consumer choice economy, wholesale might seem counterintuitive. But, part of making customers happy is being where they are, which is why it’s worth evaluating any sales channels on which consumers might shop.

Business Impact

Wholesale is operationally very different from retail. Before jumping in, ensure your business is setup for success:

  1. Pricing, Margins, and Payment Terms: Wholesale prices are typically 50 percent of retail manufacturer’s suggested retail price (MSRP). While standard payment terms may be “Net 30,” it is common for retailers, especially larger ones, to pay in 90-120 days. Additionally, many retailers require you to ship extra product, for free, as samples and backup for merchandise that breaks or is damaged between the factory and retail floor. This means not only that your cost structures must support wholesale discounts and freebies, but your cash flow needs to support the long window between your manufacturing expenses and payment.  
  2. Retailer Rules: Large retailers often place strict order, fulfillment, and return requirements on their vendors. They may ask for specific product labels, folding, and packaging. Some also require ordering processes to use specific platforms or conform to unique formats.

Designing An Appropriate Strategy

Once you decide wholesale is right for your business, you need to develop an appropriate wholesale strategy to support your goals. Do you want to employ a volume strategy and partner with as many resellers as possible? Or, do you want to select a limited number of retailers to work with? Do you want your products in big regional or national chains, local retailers, or both? Think about what each partner provides—who are their customers? Where are their stores located? What other brands and products do they carry? How will partnering with them affect your brand and your current consumer channels?

You should also consider your product mix. What do you want to offer through your wholesale channel? Some retailers mitigate potential conflict between their wholesale and consumer channels by offering different products through each. Some retail partners may be willing to invest promotional dollars or premium merchandising space in their stores when you provide them with exclusive or early access to products. Again, the products you offer and the deals you negotiate must reflect your objectives for the channel.

B2B eCommerce Platforms & Wholesale

Just like B2C eCommerce platforms like Magento and Shopify have helped brands capitalize on consumers shopping online, B2B eCommerce platforms can help retailers successfully operate a wholesale channel. B2B platforms provide three key benefits to retailers looking to expand into wholesale:

  1. A robust suite of sales enablement tools to help sales representatives merchandise and sell products to retail buyers online, and in-person (at trade shows, in showrooms, or elsewhere).
  2. Helps brands discover new buyers.
  3. Through integration with order and inventory management systems such as Stitch Labs, B2B eCommerce platforms streamline the wholesale process and reduce costs.

Entering the wholesale channel can provide your brand with enormous benefits, however they must be weighed against potential risks to ensure that it is the proper choice and, if so, develop an appropriate strategy for your business that will best serve your target customer base.

From Retailer to Wholesaler: The Next Retail Evolution

For years, manufacturers, wholesalers, vendors, and suppliers have been encroaching into retailers’ space. In addition to selling products to retailers, they sell directly to consumers through eCommerce and drop shipping. They’ve been building standalone stores, even setting up pop-up shops within retailers’ brick-and-mortar locations. By competing with retailers on their own turf, vendors are syphoning off some of the profits that retailers once enjoyed. Now, savvy, modern retailers are finding ways to combat this issue.

Commonly referred to as “pop-in retail,” stepping up such partnership efforts with non-competing brands, or even indirect rivals, serves up many benefits. This solution is less expensive than setting up new brick-and-mortar stores. It also allows retail brands to expand reach quickly into new markets with little overhead investment. Importantly, it puts the retailers products in front of new potential customers by taking advantage of existing foot traffic. Finally, it shifts the risk of slashing prices and losing margins if the products need to be cleared out because they didn’t sell well.

Some specialty retailers are already pursuing this route. For example, online shoe retail specialist ALDO has been supplying its namesake shoes to Hudson’s Bay Company in Canada and its U.S. sister chain Lord & Taylor. French cosmetic store Sephora can now be found in many JCPenney’s locations. Store chain Sunglass Hut and British toiletries boutique Lush can both be found inside Macy’s stores.

Though this approach can bring brand awareness and increase sales, there are some risks that should be carefully considered before pursuing this model.

Wholesale pricing is different from retail pricing

Take a close look at costs for production, then establish wholesale prices based on these. If the price is right, the lower wholesale price is exchanged for selling higher quantities of the item, resulting in greater profits. For good returns, retailers should consider stocking these mini stores with their most popular products. It may even be a good idea to study alternative manufacturing or sourcing options to decrease the cost to produce. Finally, make sure production could be scaled to meet the potential increased demand of wholesale.

Additional logistics and warehousing needs

Retailers are more accustomed to receiving shipments than sending them, but moving into the wholesale realm can present logistics and warehousing issues. It can also add shipping costs. To help with this, take a look at what the minimum order requirements should be set at for shipping in order to make this wholesale venture thrive. Additionally, warehouse, logistics and shipping processes can be streamlined and automated with real-time inventory visibility and carrier integration to make sure the right items are shipped where and when they’re needed.

Loss of control over placement and marketing

It can be a hard for retailers to relinquish product placement, promotion and marketing control to another retailer. However, much like the pricing issue, there is a trade off: lose some control in return for added revenues, reduced capital investment, and brand elevation through cooperation with another strong brand. That’s not to say there is nothing that can be done about it. Using an analytics tool can identify opportunities that can be shared with the retailer stocking the items, which could positively impact these in-store sales.  

This strategy may not work for every retailer. However, for those who can get past the three issues listed above, the risks could be well worth the reward. Retailers should at least do the math and consider selling their products wholesale.

Brands who see success in today’s retail landscape are carefully considering all sales channels—from wholesale to direct-to-consumer to online marketplaces—when they think about how best to serve their customers. Wholesale is another way to get in front of new audiences and ensure you’re everywhere your customer is.

Fulfillment

While definitions will vary, fulfillment in the eCommerce world refers to the storage of goods and the preparation and shipment of orders to end users. Fulfillment is essentially the last mile in the supply chain, and many times the only time a brand will physically interact with their customer.  This is a critical moment, one that can cement an impression— good or bad—in your customers’ mind. For this reason, it’s imperative to understand this last phase in the product lifecycle.

In-house or Outsource?

Large and small operations alike wrestle with the question, do we handle order fulfillment in-house or do we outsource this integral function? The reasons for considering a third party logistics provider (3PL) are numerous; but many times it boils down to focus and efficiency. The allure of outsourcing is simple: by handing over operational duties, retailers can focus on what they do best—driving product decisions and connecting with customers.  

Fulfillment providers also benefit from economies of scale. Your new fulfillment partner should ship at such a volume to receive top-tier discounts from ship carriers. Ideally, these savings are passed on to you, thus negating the pick and pack service fees of the provider.  

Amazing—fulfillment pays for itself. But at what cost?

Here are four major factors to consider when you’re evaluating whether or not to outsource fulfillment.

Location, Location, Location (and Postage)

One of the most compelling benefits of handling fulfillment in-house is the ability to see your products and outgoing orders in real-time. It’s easier to find and correct defective products, spot packing mistakes, and generally to make sure things are packed and presented on-brand.

Depending on where your products are manufactured, where your customers are, and how much your average order weighs, however, your warehouse location can have a huge impact on your bottom line. When considering warehouse location, look at the Total Delivered Cost (TDC). TDC should include cost of freight from the manufacturer to your distribution facility, handling fees inside the fulfillment center, and importantly, the postage to deliver the product to your customer.

Many times, utilizing two or more fulfillment locations is a great way to reduce cost while getting orders to your customers quickly. This is especially true with a lower number of SKUs, where it’s easier to keep all units in stock at all facilities.

The benefit of using a fulfillment partner is that you can choose a location or locations that strike the most efficient balance between you, your manufacturer, and your customers.

Many times, utilizing two or more fulfillment locations is a great way to reduce cost while getting orders to your customers quickly. This is especially true with a lower number of SKUs, where it’s easier to keep all units in stock at all facilities.

The benefit of using a fulfillment partner is that you can choose a location or locations that strike the most efficient balance between you, your manufacturer, and your customers.

Brand and Packaging

How important is brand to your company? Some eCommerce companies compete strictly on cost, and appearance doesn’t matter. That’s a tough place to be. Companies are increasingly using brand distinction to connect with customers and separate themselves from cost-based competition.

When you’re shipping packages in-house at a relatively low volume, it’s easy to ensure every package looks great and has a personal touch. Working with fulfillment companies at scale, however, your mileage may vary.

Whatever partner you choose, be sure to discuss packaging options and standards to make sure you’re on the same page. Branding questions aside, simple choices like box size, or using a box versus polybag, can easily double your cost per package.

Carrier Discounts

Postage discounts is one area where a dedicated fulfillment operation is usually going to win. By the nature of their business, a fulfillment company ships more packages than you do. That translates into more negotiating power with vendors like USPS, UPS, FedEx, and DHL. While it’s not uncommon for fulfillment companies to keep some of the discount as profit for themselves, it will often still be less expensive than what you’d pay on your own. Make sure you evaluate these discounts. Pick and pack fees get all the headlines when comparing costs, but actual shipping costs will make up a significant portion of the fulfillment cost and should be scrutinized accordingly.

The Long Haul

Whatever solution you choose, factor in what trajectory your decision today will place you on in terms of business growth. If you expand your warehouse to keep up with volume this year, what happens when you outgrow it? Similarly, if you hire a fulfillment provider that meets your needs today, will you be left solving this problem again 18 months from now if you outgrow the vendor?

Moving inventory from one center to another is expensive and quickly eats away at potential profit. Whatever you choose, look for a way to test the waters before making a commitment. If you’re evaluating fulfillment companies, place a small amount of product with one or two different services to see what they’re like to work with, and uncover what issues you missed before doing an “end-to-end” experiment.

Choosing a fulfillment strategy can seem daunting.

With the right 3PL you’ll find a consistency to this last step in the product lifecycle. As you build trust with this partner you’ll be able to migrate more and more of your inventory from your warehouse to theirs – all while lowering costs, improving delivery speeds, and ensuring a scalable future for your business. Ultimately it is this consistency that builds trust and reputation with your customer.

Conclusion

In order to compete in today’s new retail landscape, brands must unshackle themselves from antiquated systems and processes that perpetuate inefficiencies. While there is more to your operations than planning, sales, and fulfillment, making these processes as efficient as possible is critical to setting  your business up for longterm success.

When these critical functions work harmoniously through a central hub, your brand will gain the increased visibility you need to make quicker, smarter, more informed decisions about all aspects of your business.

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